As the Fed's interest rate hike cycle approaches its end, the biggest concern for investors is undoubtedly: which assets should be prioritized for purchase?
David Rosenberg, a top US economist, recently stated that as the Federal Reserve ends its interest rate hike cycle, bonds should perform better than stocks.
Since the July meeting, the Federal Reserve has held its ground in two consecutive meetings, and the market expects the central bank to still not raise interest rates at the last FOMC meeting of the year next month. This is a major event, as historically, not raising interest rates for five consecutive months marked the end of the Federal Reserve's tightening cycle.
Rosenberg stated in a column on Tuesday that if the Federal Reserve maintains interest rates unchanged at the December FOMC meeting, "the (rate hike) cycle is over. The next step will be rate cuts
This is good news for bonds, as a decrease in interest rates will push up bond prices.
Rosenberg explained that during the period when the Federal Reserve kept interest rates stable, the performance of 30-year US treasury bond bonds was significantly better than stocks.
"During the period when interest rate hikes are suspended, bonds and stocks tend to rise together. But nothing performs better than the 30-year US treasury bond bond, whose traditional average total return is 9%," Rosenberg said. He pointed out that this rate of return is higher than the 7% return on the S&P 500 index during the same period, as well as the 6% return on investment grade bonds and high yield bonds.
Bonds are more attractive compared to stocks not only in terms of better returns, but also because investors bear less risk when purchasing long-term bonds than when purchasing stocks.
In fact, with the joint boost of the Federal Reserve's suspension of interest rate hikes, the US Treasury's quarterly refinancing plan, and the weak non farm employment report, US Treasuries have recently rebounded significantly.
The yield of the US 30-year treasury bond bond fell to its lowest level in more than a month on Wednesday. As traders waited for this week's US bond bidding, market concerns about supply dissipated. The yield of this long-term US bond variety fell by 7 basis points to 4.66%, the lowest since September 29th, and fell below the key technical level of the 50 day moving average, indicating that the decline may continue.
Doubts whether the recent rebound in the stock market can continue
Rosenberg expressed in a report on Wednesday that he is skeptical about the sustainability of the recent stock market rebound, as this rise is "quite worthless" and "lacks fundamentals".
He pointed out that while the S&P 500 index has risen 6% in the past 10 days, companies have released weak profit guidance, and the stock market rebound of the past few days has not involved small cap stocks.
We see that the technology stocks that are most shorted, have weak balance sheets, and struggle to make profits outperform the broader market, "Rosenberg emphasized. The lack of vitality in this polarized rebound of small cap stocks indicates that investors are concerned about the economic momentum
Rosenberg's concerns about the economy include a steady decrease in monthly job creation and a 50 basis point increase in the unemployment rate from a cyclical low of 3.4% in April to 3.9% in October. This is indeed a sign of recession, "he warned.