The Stock Market’s Most Popular Trade Faces a ‘Perfect Storm’ – .

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The Stock Market’s Most Popular Trade Faces a ‘Perfect Storm’ – .


Wall Street’s Favorite Trade of the Year faces a “perfect storm” as the Federal Reserve prepares to exit emergency measures put in place during the pandemic, according to Bank of America.

The Fed’s decision to end the easy money era of the pandemic sent shockwaves through the market and put the Dow Jones Industrial Average on track for its worst week since January.

On Thursday, the day after the announcement, cyclical stocks had their worst day in more than a year against defensive stocks as investors feared the central bank stall could derail the economy. Cyclicals include sectors such as industrials, energy and finance, whose performance is tied to the vagaries of the economy.

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A “cyclical correction is now underway,” wrote a team led by Michael Hartnett, chief investment strategist at Bank of America.

He noted that the Fed’s hawkish turn this week was “bad news” and added to the problems presented by over-positioning, China’s tightening and fading hopes for further fiscal stimulus in the United States.

On Wednesday, the Fed kept its benchmark interest rate close to zero and kept its bond buying program at a rate of $ 120 billion per month, but raised forecasts for its first rate hike to 2023 compared to 2024. More members, but not a majority, said the first rate hike could take place in 2022. The central bank also announced the end of its asset purchase program, but did not gave no details as to when the reduction started.

Last year, the Fed cut interest rates to near zero and pledged to buy an unlimited number of assets to support the U.S. economy during its most severe post-Second World economic slowdown. World War.

The 10-year bond yield fell to 1.45% on Friday in response to the Fed’s tightening plans. It peaked at 1.75% on March 31.

David Rosenberg, chief economist and strategist at Toronto-based Rosenberg Research, said that when factoring in interest rates, the S&P 500 is 20% above its intrinsic value.

He thinks investors would be foolish to ignore the signal that real rates, or those adjusted for inflation, are sending to the stock market.

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“Overweighting defensive sectors and secular growth segments that tend to benefit from a sharp slowdown in GDP growth is a good strategy,” he wrote. “At the same time, if the message from real rates proves to be premonitory, investors will be well advised to reduce their cyclical exposures. “

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