(Bloomberg) — For years, asset allocators had it easy: buy the biggest U.S. technology companies and watch the returns pile up.
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Those days are gone, buried under a slew of central bank rate hikes that are rewriting the playbooks for Wall Street investment managers. TINA, the mantra that investors had no alternative stocks, has given way to a panoply of real options. From money market funds to short-term bonds and floating-rate notes, investors are now locking in low-risk returns that, in some cases, exceed 4%.
The shift has been underway since the summer, but accelerated in September as investors embraced still-hot inflation data and a tight labor market that will force the Fed to set rates at the highest levels since the housing crisis. After Chairman Jerome Powell’s comments on Wednesday, there is little doubt that the central bank expects at least a mild recession to curb inflation.
“We have passed the tipping point of bonds offering more value than stocks, thanks to the listing and delivery of large rate hikes, and the re-emergence of inflation risk premia in the bond market,” he said. Peter Chatwell, Global Director. trading macro strategies at Mizuho International Plc. “We expect downside risks to earnings will make these equity risk premiums even less generous in the coming months.”
They don’t want to risk cash in a stock market that, by the way, is swinging more strongly than at any time since at least 1997. Investors are settling for two-year Treasuries with the best yields since 2007. One-year notes pay almost as much. , and while both are behind the latest inflation readings, that’s better than the S&P 500’s 20% rout this year.
All told, fixed income is delivering the biggest gains relative to stocks in more than a decade. Investors have immediately been pouring record sums of money into short-dated exchange-traded funds, while a record 62% of global fund managers are overweight cash, according to a Bank of America survey. They have also reduced their exposure to stocks to an all-time low.
“Cash and short-term fixed income increasingly offer lower volatility and high yield within a cross-asset portfolio,” Morgan Stanley’s chief cross-asset strategist wrote in a note , Andrew Sheets. The new appeal of these alternatives is one of the reasons why he recommends credit over shares.
The change is increasingly reflected in fund inflows and outflows. Government bond ETFs have accumulated more inflows in September than their equity counterparts for only the second time in three years. Sovereign bonds now account for 22% of all ETF and mutual fund purchases over the past year, while allocations to stocks are now down to 2% over that time, according to Deutsche Bank AG.
The foundations of the post-pandemic rally — ultra-low interest rates and monetary stimulus — have crumbled. In their place now are high borrowing costs and tighter financial conditions that have forced investors into cash-preserving mode.
This is evident even among those who want to enter the stock market. They favor companies with strong balance sheets and high dividend yields. Cash-rich companies continue to experience strong inflows, take the Pacer US Cash Cows 100 ETF, which has only posted positive monthly inflows through 2022 totaling $6.7 billion year-to-date. Companies with steady income streams are also attractive to investors, as the $36 billion Schwab US Dividend Equity ETF has received a cash injection of $10.6 billion so far this year.
The Fed’s aggressiveness has increased the threat of recession and decreased the odds of a soft landing. That opens the door for long-term bonds to become more attractive soon, too, especially if the Fed shows signs of slowing the pace of tightening.
“When rates have peaked, it would make sense to move up the maturity curve in anticipation of lower bond yields,” said Chris Iggo, chief investment officer of core investments at AXA Investment Managers.
For Max Kettner, chief multi-asset strategist at HSBC, short-term bonds have become a better option than equities, but a clear shift from inflation concerns to growth concerns would be the trigger of an even wider movement towards fixed income. For now, HSBC’s strategy team led by Kettner has moved to a larger overweight position in cash and reduced equity exposure to maximum underweight in August.
Even the “you-only-live-once” day-trading crowd has been unable to profit from any drop in capital.
“We’re definitely seeing a regime change,” Kettner said. “The TINA and YOLO world of 2020/21 has basically come to an abrupt halt due to the combination of slower growth and higher inflation.”
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