Federal Reserve chief Janet Yellen could have said more and should have said more during her Senate testimony, and she left the impression that she and the Fed are not in touch with the mother ship, said Robert Michele, head of fixed-income, currencies and commodities at JP Morgan.
Inflation expectations seem to be least of the Fed’s worries; a serious credit contraction is underway and Ms Yellen should acknowledge that. The Fed chief should look at the capital-base being wiped off the banks in the current downdraft in equities, which is not supposed to be happening right now; they are supposed to be bullet-proof.
Gold at $1200/ounce tells investors that in a flight-to-quality in a safe-haven, people have more confidence in gold than in bank deposits or paper money. It seems things have spiraled out of control, he noted.
Investors don’t seem to have much faith in the stock market after the recent slide, part of which was caused by the global story, but partly because there are very few reasons to buy anything right now and Federated Investors are in full defense mode since the first week in January, said Phil Orlando, chief equity strategist at Federated Investors.
Federated have taken down global equity allocations by 55 percent – neutral is sixty though Federated equity holdings were up around 75-80 percent during various points over the last couple of years. Federated have increased cash and fixed-income holdings and have allocated to more defensive categories. Federated is expecting a re-test of the big uptrend as things could get worse depending upon what happens to the Fed and the economy, he noted.
Every defensive trade looks cratered right now as everybody is seeking exposure in consumer staples and utilities. Asked how he finds value that no one else finds, Phil said no one’s doing great right now. What investors are trying to do is tread water until they get some clarity on some of the issues.
For example, the dollar has topped out, in Federated’s view, at 1.05 versus the euro, and that issue is behind the market right now. The problem is that Fed dot plots established last December there would be four rate hikes this year; basically that’s what Stanley Fischer said at the beginning of 2016.
That’s why there was such a premium on Yellen’s testimony this week; the market needs to see the Fed come off this pre-ordained four quarter-point hikes path. Federated came to that conclusion (that Fed won’t be able to raise rates four times this year) a while ago based upon the fourth quarter GDP and labor market reports. In Federated’s view, seven-tenth of one percent of fourth-quarter GDP (of last year) is going to be revised lower; first half of 2016 is going to trudge along at 1 percent of less, he observed.
Asked why the Fed would say they would hike rates when the GDP is bumping along at one percent, Phil said while Federated don’t expect four hikes this year, there are major investors/brokerages from the sell-side that say since the Fed dot-plot indicates Fed Funds Rate (FFR) would rise to one-and-a-quarter by the year-end, it would be prudent to follow the Fed. That means the Fed needs to come off that path and tell them the dot-plot is just a model, he explained.
There’s a bigger disconnect out there, added Robert Michele of JP Morgan. A recent summary of economic projections showed FFR rates at three and a quarter in 2016 while the market is expecting it to remain at less than one-percent; that’s what has been priced into the markets. That’s where the market is moving and it seems the Fed is an alternate universe, he noted.
Asked how much cash Federated is holding, Phil said depending upon the fund, it could be anywhere between 10-15 percent, which is a lot of cash for an equity shop. Federated expects the markets to go down from current levels and expects the inflection point to come by the middle of the year when some of the current issues could be resolved.
However, timing remains uncertain though Federated expects the situation to improve by the end of the year. Investors should be defensive right now, he concluded.
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