📑 Research Notes for 2023-03-06
This week, we look at stocks ignoring the bond market, ignoring the Fed's message, the Taylor Rule as a guide for rates, and capital controls in China.
We conduct extensive investment research and share the most interesting content that we come across every week. Here is a curated list of this week’s top observations.
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Stock Traders Are Ignoring Blaring Bond Alarms.
Recent warnings from the bond market about inflation and interest rates are being ignored by investors in the stock market. Despite rising bond yields and expectations of higher interest rates, the stock market continues to rally. Some experts believe that this is due to investors' belief that the Federal Reserve will intervene to prevent a major sell-off, while others warn that the stock market may be in for a rude awakening if bond yields continue to rise.
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Markets Aren't Getting Fed's Message.
Bowersock Capital's Emily Hill, is puzzled by the bullish sentiment in the stock market despite the changes in the economy due to the pandemic. She believes that traders are not getting the message from the Fed, which is more focused on the real economy than on financial markets. She also notes a disconnect between the market's pricing and what is happening on the ground in the real economy. Hill suggests that the market is looking for optimistic signs and that there is still a lot of money out there.
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The Fed Is Paying More Attention To The Taylor Rule.
Stanford Professor John Taylor discusses the Taylor Rule and the Federal Reserve's recent attention to it. The Taylor Rule is a formula that suggests the target interest rate should be between 9% to 10%, depending on the inflation rate. Professor Taylor believes the current inflation rate is around 4% and that the target interest rate should be around 6%. The Federal Reserve has used the Taylor Rule in the past, but it is not without controversy. Some critics believe it is inflexible and relies too heavily on calculations. However, Professor Taylor believes the Fed is paying more attention to the rule and getting closer to following it, although he thinks they still have a ways to go to reach the desired target interest rate. The video also touches on the idea that the market expects interest rate cuts next year, but Professor Taylor warns against cutting too fast and the potential dangers that could come with it.
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'I Can't Get My Money Out': Mark Mobius Says China Is Restricting Capital Flows Out of the Country.
Mark Mobius believes that China's increasing restrictions on capital outflows may impact foreign investors' ability to invest in Chinese markets. He suggests that investors should focus on Chinese companies that have a global presence and are less likely to be affected by these restrictions. Mobius also thinks that the Chinese government's recent focus on "common prosperity" may lead to greater regulation of certain industries, such as technology and education, which could impact investment opportunities in these sectors. Overall, he advises investors to be cautious and do their research before investing in China.
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Last Week’s Market Performance Heatmap
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Curated by Joseph Lu, CFA®
Joseph is the founder and a managing director of Conscious Capital Advisors, as well as a CFA® Charterholder.
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