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Rally fatigue: dichotomy between markets and economy too wide
Wednesday 01 March 2023
Global Investment Views, Equity, Fixed income
Rally Fatigue: Dichotomy Between Markets and Economy too Wide
March 2023 | The dichotomy between loose financial conditions and tight lending standards for the real economy is striking. Markets remain priced for perfection, despite high uncertainty and divergences on the economic front. Regarding the US, we see deteriorating quarterly dynamics for the second part of the year. For the eurozone, we upgraded our gross domestic product projections for 2023 but our growth expectations remain flat. Inflation is declining slowly, but markets see it falling rapidly. With regard to central banks, we see that the US Federal Reserve is close to the end of tightening, but the European Central Bank is still hawkish. Finally, appetite for emerging markets is returning, but regarding developed markets, caution prevails. Against this fragmented backdrop, we think investors should remain cautious and recognize that uncertainty is high.
01 | Amundi Institute Insights: The rally has gone too far based on overly optimistic assumptions that inflation is falling fast, the job of central banks is done, and the economy is well on track for a soft landing, with no earnings recession.
02 | Fixed Income: We do not expect the Fed to start rate cuts before January 2024, and the ECB is unlikely to cut rates any time soon. We suggest investors consider the attractive yield environment in credit, lean towards high-quality credit, and explore select emerging market debt while staying cautious on high yield.
03 | Equity: This year’s rally is a case of multiples expansion, making us cautious overall as valuations are expensive in some cases. Accordingly, we suggest investors avoid risky, high beta names that are now excessively dependent on an unpredictable economic cycle.
Important Information
Unless otherwise stated, all information contained in this document is from Amundi Asset Management US (Amundi US) and is as of March 1, 2023. Diversification does not guarantee a profit or protect against a loss. The views expressed regarding market and economic trends are those of the author and not necessarily Amundi US and are subject to change at any time based on market and other conditions, and there can be no assurance that countries, markets or sectors will perform as expected. These views should not be relied upon as investment advice, a security recommendation, or as an indication of trading for any Amundi product. This material does not constitute an offer or solicitation to buy or sell any security, fund units or services. Investment involves risks, including market, political, liquidity and currency risks. Past performance is not a guarantee or indicative of future results. Amundi Asset Management US is the US business of the Amundi Asset Management group of companies.
Other news
05/27/2023
Global Investment Views, Equity, Fixed income
Bonds are Back on the Radar Screen
Markets are pricing in a rosy scenario in which economic deceleration will force the Fed to cut rates in 2023. However, we believe the Fed will stay on hold for 2023 and cut rates only in 2024. Inflation is cooling slowly, and the US economy is cooling down as well. From an equity perspective, we remain concerned about future profits, which leads us to stay defensive on equities and credit. On the fixed income side, we stay constructive on US duration and expect the US yield curve to steepen.
05/02/2023
Global Investment Views, Equity, Fixed income
Not a Time to Change Course
We see a deteriorating US economic environment amid the Fed's slowing monetary tightening, rising costs of credit for the real economy, and stubborn core inflation, particularly in Europe. A weak US economy is unlikely to leave Europe untouched. Thus, we suggest maintaining a cautious tilt on risk assets, strengthening hedges, and utilizing the safe haven characteristics of US Treasuries. On the last issue, the Fed is close to the end of its tightening cycle and this may create opportunities in the medium term range of the yield curve.
03/31/2023
Global Investment Views, Equity, Fixed income
Crisis Memories Return in Vulnerable Markets
March brought a wake-up call to markets after a complacent start to the year. The trigger was the failure of Silicon Valley Bank and other US regional banks, followed by that of Credit Suisse in Europe. The repricing of core yields and changes to market expectations regarding central bank actions have been massive in both the US and Europe. Bond volatility reached the highest levels since the Great Financial Crisis, while equity volatility also spiked, but to a lesser extent.
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