Market Musings 181123: Stick or Twist on Stocks?

Summary:

Global stocks rebounding - approaching recent peaks
UK, Emerging Market stocks continue to lag
Sell at the highs or wait for more? Follow leading sectors

Video this week:

Our investment strategy for November 2023

In this podcast Edmund Shing, Global Chief Investment Officer of BNP Paribas Wealth Management unveils his investment strategy for November 2023.

1.The one rate to rule them all: the US 10-year Treasury bond yield. The global economy is most sensitive to long-term interest rates, because so much depends on them. The US 10-year treasury yield is the key interest rate in the largest economy, in the world’s reserve currency. The single critical indicator to watch.

2.The US 10-year yield is now 1.5% higher than in May 2023: then, the US 10-year yield sat under 3.5%. In just five months, this yield has risen to close to 5%. This sharp increase in bond yields has prompted large inflows to US bond ETFs and funds as investors seek to lock in the highest US bond yields observed since 2007.

3.Higher long-term rates do the Fed’s job for them: house mortgage and corporate loan demand have both declined as long-term rates have jumped. This cools future demand growth, and thus helps to calm inflation pressures. We continue to believe that the Fed Funds rate has peaked at 5.5% and should fall from mid-2024.

4.US longest-duration bonds have suffered even more than stocks did in 2008: 20Y-30Y US Treasuries have fallen in price by 64% since mid-2020. This is even worse than the 57% in stocks during the 2007-08 Financial Crisis. This represents the biggest US bond bear market in over 200 years.

5.Look at US fallen angels within high yield credit: fallen angels have historically offered a superior risk-reward opportunity to traditional high yield credit. Income investors could consider fallen angel ETFs and managed funds.

Global stocks rebounding - approaching recent peaks

Thanks in large part to weaker reported inflation trends, long-term interest rates in the form of US, European and UK bond yields have also declined from recent peaks.

US 10-year Treasury yield eases to 4.4%