| Guy Beit-Or, Chief Economist of Psagot Investment House
US stock markets have ended their worst week since October 2020, amid growing expectations that the Federal Reserve is expected to provide an aggressive monetary policy in the coming months, which will include rising and lowering the balance sheet in a relatively short period of time. .
Raising interest rates and draining liquidity in markets inevitably leads investors to re-price the markets, with the background of supply chain disruptions continuing, prices and commodities peaking, and economic data beginning to signal the weakness of the private consumer.
Beyond these developments, it is impossible not to mention some key companies that have reported disappointing results, which have led to sharp declines in their value and which have dragged their entire sector down. Two notable examples are Netflix (NASDAQ :), which fell more than 20% on Friday only ,Goldman Sachs (NYSE :), which was down 8% with the publication of its report, or JPMorgan (NYSE :), which was down more than 6% after the publication of its report.
The main victims of these developments are also the growth companies, whose multipliers have skyrocketed over the past two years. An index, for example, has already entered the territory of correction in the last week and is 14.2% Below the peak it reached last November.
The current situation in the markets is complex, and given the high and temporary inflation environment, it is difficult to see how the Fed can calm down, as interest rate hikes as well as balance sheet declines are the order of the day, and after years of unprecedented yields
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Already a few months ago we recommended to start and move to a more defensive strategy in the stock markets, against the background of a number of basic assumptions:
- First, inflation will accompany us for quite some time.
- Second, central banks will be forced to respond to this inflation while raising aggressive interest rates from what is estimated.
- We have estimated, and we still estimate, that economic activity is expected to slow significantly this year.
- The markets are trading at extremely high multipliers.
Therefore, at the beginning of an increased period of volatility, which we expect to accompany us for a long period of time, we recommend a lack of weight in the US, which is at a particularly vulnerable point, given the high weight of growth stocks in it. Infrastructure, real estate and energy. In addition, we recommend companies that deal with technology infrastructures, such as payments, security and cloud, which in the new economy are likened to basic infrastructures like electricity and water.
Outside the US, we continue to recommend overweight in Israel, Europe and especially Italy and Spain. In addition, it is worth starting and opening eyes towards emerging markets, which are expected to benefit from China’s change of direction, where only last week two were made.
In the bond market, we continue to recommend a position that is expected to benefit from an environment of high inflation and weak growth. Rising interest rates in Israel are also expected to hurt the short- and medium-term shekel channel.
However, the long shekel channel is facing some forces that are expected to work in opposite directions. Finally, in light of our assessment that neither the Fed nor the Bank of Israel will be able to provide a full turnover rate, and given the weakness in the stock markets, at some point the run for safe assets will lead to a decline or at least stability in long-term bond yields.
Therefore, the stagflation mix combines short-term indexed bonds, which will benefit from inflation, along with the long-term shekels, which will benefit from the weakness in the markets and economic activity.
In the corporate channel, we continue to recommend increased exposure to high-rated bonds, with a preference for short-term bonds, such as banks, which are an excellent alternative to government bonds, with a relatively low level of risk.
The author is the chief economist of Psagot Investment House and has no personal interest in the review. This review is not a substitute for investment marketing that takes into account the data and special needs of each person.