“let’s all meet up in the year 2000 Won’t it be strange when we’re all fully grown? Pulp

The Federal Reserve and the capital markets appear to continue to have differing views when it comes to inflation expectations. As longer-dated bond yields continue to rise, rather Icarus like the equity high fliers have suddenly appeared to get burnt and have fallen. Inflation sensitive sectors, for example, metals,  miners and energy are strongly outperforming. Last years dogs are becoming this year’s darlings, in the past 10 days value has significantly outperformed growth.

Powell, speaking to Congress on Wednesday evening, reiterated the Federal Reserves view that  “the economy is a long way from our employment and inflation goals, and it is likely to take some time for substantial further progress to be achieved.” 

There you have it the Fed remain unconcerned by the possible threat of inflation, the market is preparing for the possibility. The Federal Reserve’s believe is focussed on the continued high level of unemployment and whilst that exists the Fed are prepared to maintain their policy stance.

The guard may be changing for those stocks and sectors that have been leading the charge, this has resulted in a stalemate for breadth in the broader indexes. The Vix index creeps higher, suggesting investors are nervous for the months ahead. Rising bond yields will lead to a de-rating of stocks as the return investors want to get from risk investing in equities needs to increase.

Traders will now have to balance asset allocation, do they continue to follow the reflation trade. Is this a long term trend or a short term mean reversion trade after a long period of underperformance? Layered on top of this will be the concerns that rising yields will impact equity valuations overall, leading to a correction in asset prices.

Longer-term thematic investors, who have done so well investing in ESG funds in recent months, but have seen something of a correction, will now be wondering when if the party is over or to double up.

As the tech bubble grew in the late 1990s,  fund managers were fired for not being involved leading to a wall of cash being thrown at almost anything .com. They were then fired for owing large amounts of companies that will never make money. The devil and the deep blue sea. Today’s fund manager, who was more likely in short trousers in 2000, may find himself facing the same impossible conundrum.