The dogs of the ASX take a beating
Fund managers are clearing out of anything that’s underperformed or at risk of underperforming, sending dozens of stocks to new 12-month and even five- and 10-year lows this week.Why markets are having nasty GFC flashbacks
Surging bond yields, sticky inflation and the spectre of further rate rises have investors facing a scenario that looks eerily similar to what occurred in 2007.
And it’s no surprise markets would become fixated on the fact that the 10-year yield,which surged to 4.658 per cent on Thursday night,has not been this high since October 2007.
In the first, the Fed raised rates to 5.25 per cent in June 2007, despite many economists suggesting the last increase was overkill. When it became clear the Fed had paused, equity markets went on a tear, hitting an all-time high in October 2007.
But the economy was slowing, and investors were betting heavily that the Fed would soon be cutting rates. Marrinan called this the denial phase.
In the second phase, the economy proved more resilient than expected, despite higher rates. Investors gave up on rapid rate cuts and instead bought into a Goldilocks soft-landing scenario. Economic growth was solid, housing stabilised, earnings fell but didn’t crack, and equities traded at full valuations with low volatility. Marrinan called this the “head fake phase – everything feels too good to be true because it is”.
Marrinan also predicted a third and dangerous phase. Inflation would prove sticky or even resurgent and the Fed would talk hawkishly about the potential for rate rises. Some investors would take note, others “stubbornly cling to the view that housing, the consumer, and high leverage in the system will be legitimate excuses for the Fed to hold off”.
He predicted the Fed would raise rates regardless, and risk assets would undergo a big correction. He was slightly off – the Fed was indeed cutting rates by September 2007, but by then it was too late.
Nonetheless, the three phases Marrinan outlined are remarkably similar to what is playing out now.
We’ve had the big series of rate rises (to the same level of 5.25 per cent in the US, in fact), and the grumbles about overkill. We’ve had the rally on markets, which has been more recently driven by AI hype. We’ve had the widespread predictions of rate cuts and the acceptance that those cuts aren’t coming, with consensus shifting rapidly to a soft landing.
We’ve even had housing stabilising, and equity markets trading at full values with remarkably low volatility.
And we now seem to be entering Marrinan’s third phase. Inflation is sticky and even resurgent, thanks in part to a30 per cent spike in oil prices since late June, and the Fed and the Reserve Bank of Australia continue to talk hawkishly; just this week, strong local inflation data has causeddebate about the potential for one more rate riseto intensify.
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