Recent market turmoil has investors asking: is the Tina trade – There Is No Alternative to stocks in a low-rate world – in trouble?
The question was prompted by recent hawkish noises coming from the Federal Reserve. The Fed will likely begin tapering its $120 billion monthly bond-buying programme later this year. Additionally, half of its 18 key policymakers expect the first post-Covid rate hike in 2022.
Most commentators agree stock valuations are elevated, with bulls arguing this is justified on the basis equities remain cheap compared to bonds. If rates go up, Barclays noted last week, stocks are automatically less attractive relative to bonds.
That said, the “beginning of the end” of the liquidity trade shouldn’t be a “major threat” for stocks, says Barclays, a point echoed by JPMorgan and other bulls. Optimists expect the world’s major central banks will likely err on the side of caution and enact gradual, growth-dependent policy normalisation. US 10-year bond yields last week hit their highest level since June but at 1.5 per cent, they remain extremely low.
Furthermore, liquidity is not the sole driver of stocks. An expansion in price-earnings multiples drove indices higher last year but this year’s gains have been supported by surging earnings, with 85 per cent of companies recently beating estimates.
Still, even bulls admit faster policy normalisation and higher bond yields represent an obvious tail risk for stocks. Consequently, the words and thoughts of global central bankers will likely remain uppermost in investors’ minds.
