On Monday the ASX200 again recovered strongly from early losses to end the session down less than 0.3%, when we take into account weak US S&P500 futures throughout much of our day and Star Entertainment (SGR) plunging almost 23% on more regulatory scrutiny for the sector, we felt it was another solid performance by the local market. It may sound myopic on our part considering we’re still bullish risk assets at current levels but stocks are still absorbing bad news and to us it has the overall feel that too many players are now short, or underweight equities.
We continue to believe there are 2 dominant forces at work within equity markets as we start Q4 of what has so far been a strong extension year to the post pandemic bull market:
- Large levels of liquidity remain, a bullish backdrop which is being illustrated by ongoing strong M&A activity and strength in the new trading favourite Bitcoin.
- Bond yields continue to rally to new multi-week highs fuelling the outperformance of value stocks against growth – a trend we believe is only just beginning.
We haven’t hidden behind our opinion that interest rates / bond yields have ended their multi-year bear market, especially from a risk / reward perspective, with this view comes a few important points that we shouldn’t lose sight of into 2022:
- The average RBA cash rate of the last decade was over 2%, while before the GFC they were at a heady 7.25%, way above todays 0.1%.
- Investors expect rates to increase but we doubt many are positioned appropriately for a period of reflation, its been a decade since rates were hiked & many homeowners have never experienced rising mortgage costs.
- Growth stocks have outperformed their value peers since the GFC while undoubtedly there have been many extraordinary success stories during the internet & tech boom the overall sector will find rising yields a headwind which could last years.
Overnight US stocks fell away into the close as fears intensified around a potential energy crisis, the Dow ultimately closed down 250-points after being up by almost the same degree with only a few hours of the session remaining, a nervous feel the best way to describe the current tone. The SPI Futures are calling a drop of around 0.4% by the ASX early on this morning in sympathy with moves on Wall Street.
MM remains bullish the ASX targeting fresh highs in the weeks / months ahead
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