Like a bat out of hell, the new year has brought a major repricing of central-bank risks. From a rather lenient stance by monetary policymakers, financial markets have started to assume a much steeper and faster path back to normal.
On one hand, this has been driven by the enormous political pressure on central banks to do something about skyrocketing inflation rates. On the other hand, the Omicron variant is perceived to be much less of a menace to humankind and its economy than feared. So much for being ‘careful what you wish for’. But here we are, and markets have started to price in four rate hikes for the US and a first hike in the eurozone this year, and even a first rate hike for ‘zero rates forever’ Japan by the middle of the decade. If we compare these assumptions with what else is priced in, we see that the value-versus-growth premium has vanished in just a few weeks.
Mood swings and the market
So in no time, the mood in financial markets has shifted from being jubilant to one of despair. The S&P 500, the poster child of the raging equity bull, has broken below its 200-day moving average. This is bad. A lot of damage has been done to the charts, and it will take time to heal. Our technical analysts expect some trading range for the leaders of the past over the coming weeks. However, the good news is that the current point may be rather at the lower end of the range. In fact, rate-frenzy investors will likely consult the history books and realise that rate hikes are not that hurtful after all (see number of the week). While doing so, they will see plenty of single names that look attractive now.
Conclusion for investors
To cheer everyone up, we call for adding more beauty to portfolios. Hence, there are plenty of opportunities, while only one in five investors dares to be bullish now – close to any low we have observed in the past ten years. Cheer up! It will be gone by the time the morning comes.
Number of the week