-The Fed reaffirmed that rates will likely stay low
-Asset classes that didn’t participate in this rally are starting to look like good investments
-Tech is down but not out
Hi there—here is this week's update!
This week the Federal Reserve had their meeting, and they reaffirmed their forward guidance that rates would stay low through 2023.
The markets have become addicted to Fed policy. Subsequently, the lack of additional monetary stimulus being stated by the fed and the needed emphasis for fiscal stimulus from Congress has left the markets hanging dry.
Following the fed meeting, there has been a fairly aggressive sell-off in equities as well as a milder sell-off in the fixed income markets.
The general trend in the markets has been a liquidity-driven rally; however, this has left a great deal of opportunity for assets that haven’t participated as much in this rally.
We believe there are opportunities in lower-rated fixed-income credit and securitized credit. There is a lot of relative value, specifically in CLOs and mortgage-backed securities. Since the financial crisis, these structures have had substantially higher scrutiny, and we believe that they are structured better than they were pre-crisis.
Our view is that managers that specialize in securitized credit should perform better than their peers that participate more exclusively in single name corporate credit.
Tech & Outlook
As we see the rotation out of tech, we see this as a shorter-term trend in stocks, and we still like the long duration cash flow opportunities provided by the tech sector. We will be selectively adding as we see sell-offs arise in this area.
The sell-off in equities may be tied to the retail investor losing steam. There’s been a great deal of retail participation in the stock market since COVID-19 reared its ugly head at the beginning of the year. Retail participation in the stock market was at about 15% pre-COVID and is now at about 20% post-COVID. We believe this is a significant driver of irrational exuberance.
The sectors that have participated heavily in this rally and sectors with a larger than normal retail presence are the most vulnerable to being hit in the medium term as the economy and the financial markets begin to align.
As of today, there’s a significant divergence between economic prosperity and asset prices, and our view is that this spread should close in the coming months. It's looking more and more likely that prices will converge with the economy, and not that the economy will converge with prices.
See you next week,
-Saul & The Round Team
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