Μarkets performed better than ever in a 52 week period. That is, exactly one year from their lowest point as a consequence of the pandemic and the closure of the economy. The pandemic created unique conditions to the global economy and triggered an unprecedented reaction of governments and central banks.
These unique conditions make it quite difficult to make a prediction for the future, since the search for past data is usually incomparable. From 1945 onwards, 12 periods of recession have been recorded, including those of 2000 and 2008, which had driven markets to overwhelming losses. Data analysis shows in 5 years, markets have recovered dynamically with the average profits for S&P 500 amounting to almost 120%.
From the lows of March 2020, S&P 500 made an 81% rally, which as mentioned above is the biggest in history. It rather makes sense that at some point there will be a correction which is normal and we take it as such. We are monitoring the course of the US and global economies, but we are not trying to link market correction to some other macroeconomic cause. We are monitoring the course of the US and global economies, but we are not trying to correlate market correction with some other macroeconomic cause.
Obviously, after the extreme fluctuations of both markets and economies, there is an increased chance of fatigue, both from investors and from the economies themselves. We should not forget that the Eurozone has entered a new era of implementing measures to reduce virus spread and this is worsening their macroeconomic reality.
On the other hand, it is also clear that there is a different approach to monetary policy by Fed. Not in essence but in words. It is obvious that Jerome Powell, after the transition of presidency, has followed a somewhat ambiguous strategy, which provokes insecurity to investors. And as you know, investors do not want insecurity and sometimes get to show it through strong pressure on stocks.
Adding to all the above, there is the issue of rising interest rates in treasuries as we have already analyzed in our previous investment report. It seems, however, that a possible peak of the bonds' upward trend may be appearing. For the time being, the situation is particularly fragile as the latest auctions of 7-year and 10-year bonds have not attracted investment interest, resulting in a higher yield and therefore increased volatility.
However, increased returns also lead to increased investment interest. This is the nature of the bond market. Both Morgan Stanley and SocGen have pointed out that bond yields are now very attractive and are both positive in increasing their positionings at these levels. After all, everything points to the fact that the rebalance that is already taking place will attract very significant funds to the treasuries. According to BofA, about $ 41 billion will be liquidated from stocks and will be directed to bonds.
If we consider which stocks have recorded eruptive returns and how many of them are over-concentrated in the portfolios of large managers, this transition is expected to be rather violent and in a relatively short period of time.
Although SocGen does not rule out the possibility of a new increase in returns, it estimates that the big uptrend has already been completed and therefore significantly increases the exposure of its portfolios to treasuries.
The next conferences will definitely be quite interesting as we should expect increased volatility. We estimate, however, that the trends that have arisen mainly due to the fear of a sharp rise in inflation will be reversed.
The graph above shows the inflation estimates as captured by the respective indicators and then there is their spread. Clearly, investors are already at levels where bond exposure (IEF, TLT) is likely to generate profits in the coming weeks.
Rising interest rates do not seem to be a problem for companies with high-yield bonds. And this comes as in the first quarter of 2021 there was a new record in high-yield bond issues. The total amount of issues already reaches $ 139 billion and even surpassed that of the second quarter of 2020, when US companies rushed to borrow in order to face the pandemic.
These numbers are more than certain that they will create credit problems when interest rates move higher. But for the time being, in addition to low interest rates, there is an increased demand for higher returns, this mechanism will continue to work extremely well and support the markets.
However, there is also an increase in investment grade bond issues, as interest rates are even more tempting. In recent months, giant companies have borrowed significant sums of money to fund either the repurchase of their own shares or the payment of their dividends. This practice has led to the downgrading of the debt of some companies, such as Exxon Mobil and Oracle.
Debt restructuring is probably the hottest issue for big companies this time. As the interest rates of the bond issued during the pandemic were slightly higher and as many of the companies had to repay bonds, they chose to repurchase them and issue new ones with lower interest rates. The five-year profit is so great that even the "penalty" of early repayment is not a deterrent.