Downward correction provides good risk reward of Investing.com


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By Laura Sanchez

Investing.com – Fed chairman Jerome Powell’s reassuring message that he would avoid the possibility of a one-time 75 basis point gave the market only temporary grace.

“Yesterday, Wall Street parried all gains, bond yields reached new highs and the dollar returned. It remains high because monetary tightening is accompanied by fears of growth,” warns Renta 4 (BME: RTA4).

European markets -,,… – are also in the red.

“Wednesday’s recovery therefore appears to be an illusion until we can confirm that inflation is under control,” Renta 4 said.

“It’s hard to explain what could have changed so abruptly in the period between Wednesday afternoon, following Fed Chairman Powell’s press briefing, and the start of yesterday’s meeting,” said Link Securities experts.

“The truth is that everything seems to indicate that many investors in both the bond and stock markets appear to have ‘talked’ the outcome of the Fed meeting,” it said.

Right now, “the biggest fear is the unknown,” according to Federated Hermes (EPA: EPA :).

What to expect

“Developments in the US, Asia and Europe could result in lower commodity prices and a lower. With US Mutual and High Yield rates above 4% and 7% respectively, there are good returns to be reaped while we wait,” adds Federated Hermes.

“We see exactly what we expected when we chose a strategy that is more protection than risk: semi-structural high inflation, rapidly rising interest rates, central banks warning of background risks, mixed corporate results and questionable forecasts and a weakening of the economy cycle., ”said Bankinter.

“Investors are appalled by the Fed’s unprecedented cycle of tightening and loss of balance sheets, as well as the Bank of England’s rigid stagflation forecast, which predicts that a G7 economy will experience 10% inflation and recession by the end of the year. Risks vary in US, Europe and China, while overall valuations still provide little support, “said Ben Laidler, Global Markets Strategist at eToro.

Can we buy autumn?

However, he emphasizes: “We see the possibility of ‘less bad’ news about top inflation of 8.5% and an already aggressive 3.5% interest rate cycle, with robust interest rates, a very depressed mood and a good risk / return ratio Buy ‘corrections ‘or’ 4 percent down days’ over the next 12 months. We are very focused on defensive stocks with low valuations and cash flows. It’s still too early for technology stocks.

It is now 14 percent below its peak at the beginning of the year 18 long weeks ago. This is roughly the size of the average “correction” of -17 percent and took longer. The risk / return ratio of buying this typical correction over the next 12 months is very positive. In the same way, buying the rare (about 18 months) 4 percent bear day gives an average annual return of about 20 percent, ”said Laidler.

“Furthermore, our contradictory sentiment indicator is already at levels seen only before the serious dives from the Covid crisis in 2020 and the financial crisis in 2008,” he adds.

basic

“Bond yields will not rise forever, but with the massive reduction in the Fed’s balance sheet, we are in unknown territory. Conversely, earnings, which rose 10 percent in the US and 35 percent in Europe in the first quarter, hold so far,” the eToro expert concludes.

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