Market Extract: Taper Talk, Cash Balance, and Growth vs. Value

What’s going on in the market today, and how might your business, your portfolios, and your clients be impacted? The Market Extract aims to provide a condensed, clear, and highly relevant view, with insights from Advanced Asset Management Advisors’ investment committee to you. 

The Fed has spoken. On June 16th, the Chairman alluded to talks of tapering. Since then, various regional presidents have espoused their own position about “the talk”. At this point, nothing has changed regarding a timeline to reduce asset purchases or raise rates. And all spokespersons continue to emphasize their view that inflation is “transitory”. However, one major metric has changed. The Fed has been implementing reverse repurchase agreements that remove cash from the system.

These contracts pay 5 basis points. The facility has swollen to $800 Billion. In the matter of a few weeks the Fed has drained 6 ½ months of asset purchase program liquidity. On one hand they are buying assets, pumping cash into the system. On the other they are removing those assets, draining cash from the system.

Clearly, they are fighting to keep short term rates above zero. It seems it might be simpler to just stop buying assets, but that would likely trigger a massive, negative psychological reaction in the markets.

Growth vs. Value With Volatile Interest Rates

The peak of Growth’s relative strength in the stock market occurred on September 1st, 2020. The 10 year Treasury yield was 0.68%. As rates rose to their recent peak of 1.74% in March, Growth continued to struggle. As rates rolled over, Growth’s relative strength started to improve. Over this short time frame, these two data series have a -0.9 correlation, which confirms longer-term sensitivity. Since the Fed’s comments on June 16th, Growth’s relative strength has continued to improve sharply—suggesting that equity investors are gaining confidence in the Fed’s narrative that the recent spike in inflation is indeed transitory.

Chart showing the correlation between the relative strength of Growth investments in relation to the 10 Year Treasury Rate (with a correlation of -0.9)

The information and opinions in this report have been prepared by the investment staff of Advanced Asset Management Advisors (AAMA). This report is based upon information available to the public. The information herein is believed to be reliable and has been obtained from sources believed to be reliable, but AAMA makes no representation as to the accuracy or completeness of such information. Opinions, estimates and projections in this report constitute AAMA’s judgment and are subject to change without notice. This report is provided for informational purposes only. It is not to be construed as a recommendation to buy or sell or a solicitation of an offer to buy or sell any financial instruments or to participate in any particular trading strategy in any jurisdiction in which such an offer or solicitation would violate applicable laws or regulations.

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