While the stock market has recovered recently seems to be on the shaking ground, Deutsche Bank said staying on course makes sense in the new year as the Federal Reserve returns to its rate of interest rate hikes.
Deutsche Bank strategist Binky Chadha wrote in a note on Tuesday: “We expect rate volatility to decrease as the Fed slows the pace of rate hikes and as policy rates move closer to final capacity”. “We look for equity volatility to decrease with interest rate volatility, for systematic strategies to increase equity risk exposure from extreme lows and see a recovery of equity has to go even further.”
Chadha’s research shows that stocks have tracked interest rate movements over the past few months, and he expects that trend to continue moving forward and benefit the stock.
“While the S&P 500 has been at current levels four times in the past five months and rates consistently higher at each point, it has tracked the implied rate vol at the same level each time,” Chadha added. “Furthermore, on occasions where interest rates and interest rates differ, the stock market has tracked interest rates rather than interest rates.”
Investors have somewhat benefited from the sell-off that has dominated the market for much of 2022 as aggressive Fed rate hikes are expected to slow.
Amid signs of inflation slowing, oil prices falling and the US dollar falling again, stocks have rallied since their October lows. Over the past month, the Dow Jones Industrial Average (()^DJI) rose 3%, the S&P 500 (^GSPC) rose 1.6% and the tech-heavy Nasdaq Composite (^IXIC) is almost flat.
Those interests are under pressure as concerns grow about a Controversial COVID-19 lockdown situation in China and how big manufacturers like Apple will be affected.
Chadha’s argument contradicts a recent note by Goldman Sachs that confirmed stocks are more likely to take cues from the short-term trajectory of interest rates and economic growth than from further interest rate expectations.
Christian Mueller-Glissmann, strategist at Goldman Sachs, wrote: “We remain relatively defensive over the three-month period with further headwinds from the possibility of a real output increase and uncertainty about the increase. prolonged growth”.
Mueller-Glissman recommends that investors should follow the excess weight (more exposure to) cash and credit in the near future. The investment bank, which is underweight bonds and stocks (with less exposure), sees an opportunity to “add more risk” in 2023 — but the time is not now.
“Without undervaluation, for the market to bottom, investors need to see inflation and interest rates peak, or trough, in economic activity,” Mueller-Glissmann added. “The growth/inflation relationship remains unfavorable – inflation is likely to normalize but global growth is slowing and central banks are still tightening, albeit at a slower pace.”
Brian Sozzi is an editor-in-chief and anchor at Yahoo Finance. Follow Sozzi on Twitter @BrianSozzi and more LinkedIn.
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