With US interest rates at 40-year lows and against a backdrop of recent economic data suggesting inflation is on the rise, investors might consider selling US stocks short, in anticipation of lower stock prices after the Federal Reserve all-but-surely tightens monetary policy by summer.
That’s one conclusion that investors can draw from a report by Russ Koesterich, Chief North American Equity Strategist at State Street Global Markets. And the selling seems to have already started, according to Koesterich.
In the wake of stronger than-expected US economic data, including a potential rebound in the labor market, investors are focusing on when the Federal Reserve will raise short-term rates, writes Koesterich. Based on historical patterns, an upward bias in rates suggests diminishing returns for large cap US equities over the next year, he suggests.
Short-term rates have been on hold since the Fed’s lowering of the funds rate from 1.25% to 1.00% in June 2003. The next rate move will most likely be higher and push the funds rate above its long-term average (12-month trailing average) for the first time since December 2000, Koesterich points out. Over the past 50 years, whenever this has happened, returns over the following 12 months have been below those in low-rate periods, he says.
Read: now is the time to sell – and clearly investors have gotten that message, according to Koesterich. Large institutional investors have clearly internalized this thinking, he says, and have accordingly reallocated their sector mix. Institutional investors are abandoning technology, consumer discretionary and select financial names, with technology selling particularly acute, he points out. “Flows are picking up for the first time in months in consumer staples and healthcare stocks. We are also witnessing a renewed appetite for energy names, with oil Equipment and services garnering most of the interest. Institutional investors appear to be quickly adapting to an environment in which monetary policy is no longer positive,” said Koesterich.
Koesterich’s comments are part of a new series of monthly research reports to be released by State Street, the bank said.
State Street has $9.4 trillion in assets under custody and $1.2 trillion in assets under management, and operates in 24 countries and more than 100 markets worldwide.