In the largest shift in sentiment since 1999, equities have become the flavour of the year, crushing what many analysts had predicted as the “Year of the Bond”. These predictions made back in December 2022, seemed to be coming to fruition in early 2023 as the economic outlook of despondency that supported such predictions seemed the right call.
However, from Hong Kong to London to New York, the demand for bonds has taken a backseat to equities. This has produced a massive rally across the world, and analysts suggest that investors are even more optimistic about equites as signs suggest that gains are far from over.
Although the Federal Reserve raised interest rates last week, the sentiment is that aggressive rate hikes are coming to an end and, indeed, last week’s hike may well be the last. This, together with a more dovish leaning toward monetary policy, should have made bonds a safety net against a downturn in growth.
Instead, analysts and the Federal Reserve itself are no longer predicting a recession in the US Economy: growth keeps accelerating with new jobs being created and inflation cooling. Many experts are signalling a buy for equities whilst at the same time bonds are failing to live up to their sobriquet of a safety net, and as predictions of a recession recede the buzz word in the markets is “A Soft Landing”.
A lot of expert investors have been taken by surprise by the shift from bonds to equities with figures released showing that whether there is a soft landing or not investors are increasing their exposure to equities sacrificing their interest in bonds. Indeed, in a reversal at the start of 2023, data released for Exchange Traded Funds ETFs, indicate equities being preferred to bonds.
It should not be forgotten that bonds have returned positive returns for investors, with market data showing big yields being collected for little risk. However, not many foresaw massive gains in equities with the Nasdaq 100 (tech heavy) posting gains of 44%.
But as a number of experts have said, there are other considerations to be taken into account. For example, the cooling of inflation may be attributed to the fall in energy prices, whilst the 5 ¼% hike in interest rates may take up to two years to feed through to the market. So, with equities on the rise, the smart money may not be writing off bonds just yet.