From Mid-Cycle Reset to Cyclical Recovery
novembre 19, 2019
This time last year the market projected the economy was headed into a recession, and the Fed engaged in a policy mistake by planning to hike rates above 3.00%. Instead, what we realized was 75bps of rate cuts along with cuts from global central banks and a restart of quantitative easing (QE). This was termed a “mid-cycle reset” by central banks. This sets the stage for what may follow; a cyclical recovery, for which fixed income markets may not be fully priced. We believe the investment opportunity lies within a rotation to the cyclical and less rate-sensitive sectors of the markets where valuations are, in our opinion, considerably more attractive.
The Fed: From tightening to easing to neutral
Asset Price Impact
In summary, what was unique about 2019 was that central banks cut rates aggressively and pushed bond yields lower to avoid a recession that never occurred. This may have been an insurance policy well worth the premium. However, it created significant performance in interest rate sensitive sectors of fixed income that may struggle if we get even a modest cyclical recovery in 2020. Said differently, yields are too low and spreads tight in perhaps all the wrong places. We believe the investment opportunity lies within a rotation to the cyclical and less rate sensitive sectors of the markets where valuations are, in our opinion, considerably more attractive.
There is no assurance that a Portfolio will achieve its investment objective. Portfolios are subject to market risk, which is the possibility that the market values of securities owned by the Portfolio will decline and may therefore be less than what you paid for them. Accordingly, you can lose money investing in this Portfolio. Please be aware that this Portfolio may be subject to certain additional risks. Fixed-income securities are subject to the ability of an issuer to make timely principal and interest payments (credit risk), changes in interest rates (interest-rate risk), the creditworthiness of the issuer and general market liquidity (market risk). In a rising interest-rate environment, bond prices may fall and may result in periods of volatility and increased portfolio redemptions. In a declining interest-rate environment, the portfolio may generate less income. Longer-term securities may be more sensitive to interest rate changes. Mortgage- and asset-backed securities are sensitive to early prepayment risk and a higher risk of default and may be hard to value and difficult to sell (liquidity risk). They are also subject to credit, market and interest rate risks. Certain U.S. government securities purchased by the Strategy, such as those issued by Fannie Mae and Freddie Mac, are not backed by the full faith and credit of the U.S. It is possible that these issuers will not have the funds to meet their payment obligations in the future. High-yield securities (“junk bonds”) are lower-rated securities that may have a higher degree of credit and liquidity risk. Public bank loans are subject to liquidity risk and the credit risks of lower-rated securities. Foreign securities are subject to currency, political, economic and market risks. The risks of investing in emerging-market countries are greater than risks associated with investments in foreign developed countries. Sovereign debt securities are subject to default risk. Derivative instruments may disproportionately increase losses and have a significant impact on performance. They also may be subject to counterparty, liquidity, valuation, correlation and market risks. Restricted and illiquid securities may be more difficult to sell and value than publicly traded securities (liquidity risk).
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