The Federal Reserve’s interest-rate hike campaign has been a downer to most in financial markets, but not all. Bill Ackman, the chief executive of hedge fund Pershing Square, put on a timely derivatives bet shorting short-term Treasurys, that has already paid out $1.4 billion. (Granted, he also lost about $400 million on an ill-fated Netflix
Value stocks have seen a renaissance after a lost decade. True, the iShares S&P 500 Value ETF
has dropped 13% this year, but that is significantly better than the 29% decline for the iShares S&P 500 Growth ETF
Cliff Asness, the co-founder and chief investment officer of AQR Capital Management, had been championing value ahead of its recent outperformance. In an interview with Goldman Sachs that was published by the investment bank, Asness said the outperformance will continue. “I’ve never been a strong believer that the sharp drop in interest rates fully justified the high market valuations and divergence between growth and value in recent years. But the rates reversal has clearly played an important part in the recent value rally because as long as the world believes that value is an interest-rate trade, investors are going to be somewhat hostage to that view, at least over the near term,” he said. He said value can outperform over a horizon of roughly three years because the valuation spread remains stretched.
Asness rejected the idea that value stocks could lose their outperformance if rates head in the other direction. “Our research finds no evidence that higher interest rates are necessary for value to outperform. Of course, I recognize the logic that lower rates benefit companies with cash flows further out into the future. But it’s also the case that one of the reasons value strategies tend to outperform in the long run is because investors overestimate how long growth companies will grow,” he said.
The issue isn’t that the world can’t identify good companies, but pays too much for them. He said he pushed back in 2017 that it was time to pour into value. “I wasn’t smart enough to short value heading into 2018, but I hope my pushback against value strategies back then gives me some credibility now when I say that current prices are crazy and value should continue to outperform.”
More broadly, he said the firm was underweight equities and bonds relative to normal levels, and less underweight bonds and more underweight equities than six months ago. “A big part of that is the recent strong rise in bond yields, which has left bonds looking somewhat less expensive today than six months ago, unless you expect inflation to remain in the high single-digits, in which case everything looks expensive. And, relatedly, while equities are down quite a bit, the decline hasn’t been sharp enough to increase their relative attractiveness to bonds,” he said.
The Federal Open Market Committee decision is due at 2 p.m. Eastern. Markets will focus on not just the size of the rate increase — 75 basis points, if markets are correct — but the projections on how far rates will subsequently rise, as well as the inflation and unemployment forecasts. Fed Chair Jerome Powell will hold a press conference at 2:30 p.m.
Ackman said the Fed should hike by 75 basis points at each of the next two meetings, though he said it would be even better if the Fed moved with 100 basis point rises. Jeffrey Gundlach of DoubleLine Capital advocates for a one-time 200 basis point jump.
The European Central Bank is holding an emergency meeting to discuss market conditions, after a big widening of Italian bond spreads versus German bunds.
There are also retail sales data on tap, and the Empire State manufacturing index.
Microsoft co-founder Bill Gates says crypto is 100% based on the greater fool theory. He did say he isn’t long or short “any of those things.”
Ahead of the Fed decision and a 10.2% drop for the S&P 500
over the last five days, U.S. stock futures
were higher. The yield on the 10-year Treasury
slipped to 3.40%.
These were the most active stock-market tickers as of 6 a.m. Eastern.
A 78-year-old finally got his high school diploma, denied for decades over a library book fine.
A few fans are mourning the demise of Microsoft’s Internet Explorer.
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