The yield of the 10-year US treasury bond bond is close to 5%, which means that the return of the safest investment product in the world has reached the highest level since 2007. Why invest in the US stock market in this situation? This is a new problem that investors are currently facing.
Since the 2008 financial crisis, the extremely low interest rates and record printing speed of the Federal Reserve have made so-called successful investments different from before. The nearly zero cost funding that lasted for about 15 years gave birth to a technological boom, allowing venture capitalists to reap exponential returns and triggering an investment boom in digital tokens and stocks on the verge of being abandoned by the market.
Bonds were once a useful hedging tool that could protect investors from the adverse stock market conditions and serve as a safe haven for depositing funds during turbulent times. Nowadays, bonds have regained power, with yields reaching their highest level since 2007. The Federal Reserve is tightening its policy and raising interest rates at the fastest pace in 40 years. In many ways, rising interest rates mean that there is no longer excessive speculation, but a return to fundamental investment. However, Wall Street stated that this period may be different from ever before.
We asked five investors what they are buying and where they believe potential pitfalls are.
Mario Gabriel
Mario Gabelli's investment career was accompanied by sixty years of economic ups and downs. The billionaire fund manager who runs Gamco Investors in Ray, New York state, stated that he is not yet ready to give up investing in US stocks.
Gabriel said that the Federal Reserve is trying to curb inflation by raising interest rates, while the US government is working to revitalize the US manufacturing industry and boost economic growth. Most investors are overly concerned about the contradiction between the two.
He said that although these two forces will affect the market, the federal deficit is a long-term concern, especially as interest rates rise, the country's payment burden will increase, and the increase in federal spending will force it to further borrow.
According to data from the Congressional Budget Office, the net interest on federal debt in the recent fiscal year surged by 34% to $572 billion, doubling the budget gap from the previous year to a record $1.6 trillion. However, he said, this does not mean that investors should exit the market.
Gabriel predicts that the increase in debt will drag down the stock market, making it difficult to achieve the annualized yield of 10.2% provided to investors over the past 100 years. However, he said that investors should weigh the prospects of the United States relative to the rest of the world - from this perspective, the United States still outperforms many other countries in terms of population growth and productivity.
There are extreme short-term activists in this world. In the past, when a company reported lackluster performance, its stock price dropped from $20 to $19.50. Now, you will see the stock price immediately drop from $20 to $16- these intraday fluctuations have been amplified
From a historical perspective, short-term and reactive trading can harm ordinary investors, and it is usually best for them not to change their investment portfolio.
What can I say about the next three or four months? And for the next three or four years, it's difficult to determine how the market will react to all these debts, "he said. However, for the next 30 years, I expect the US stock market to have a return of 8% to 9%
In the 1960s, Gabriel began his career on Wall Street, when the "Beautiful 50" large cap stocks in the United States dominated the market. Then, in 1977, he founded Gamco Investors Inc. Accompanied by multiple rounds of inflation and the gradual increase in interest rates by then Federal Reserve Chairman Paul Volcker to 20%, he demonstrated his skills in the investment industry and became the highest earning long-term stock picker on Wall Street.
Steve Eisman
In 2015, Steve Carell played Steve Eisman in the movie "The Big Short" adapted from Michael Lewis' best-selling book of the same name. Since then, people have always asked Eisman when and in which field the next stock market explosion will occur. This is a natural thing, as he successfully shorted subprime mortgages before the 2008-2009 financial crisis.
Eisman manages funds for Neuberger Berman, one of the largest investment companies in the United States. He stated that even if mortgage interest rates reach their highest level in 20 years, there is no housing crisis to be wary of.
He is conducting a return to fundamentals operation for clients, buying bonds for the first time in his career and buying old economy stocks - they will be beneficiaries of the frenzy of US government spending.
Eisman said, "This is the first industrial policy we have seen in the United States in decades. The money has not been spent yet - but it is a government action that can be implemented in less than a week. It has not yet had an impact on corporate income, and I believe most of the spending has not been reflected in the price of any stock
Eisman called his investment theory "revenge for old-fashioned stocks". He is paying attention to stocks in construction companies, utilities, industrial and materials companies.
What does Vulcan Materials do? It produces stones, "he said. This type of business does not involve the basic technical issues of artificial intelligence. The fundamentals of these companies are not difficult to understand, and they are also easy to take off under favorable policies
The areas Eisman is avoiding are "non investable" banking stocks and high-speed growth stocks, and he says the era of investment in this field has come to an end. Although bank stocks may look cheap, he does not expect their prospects to improve much. He said that although the banking system does not face any imminent threats, banks must pay higher interest rates to depositors, economic recession prospects, and strengthened regulation will weaken the investability of bank stocks.
Asworth Damodaran
Rising interest rates can damage the value of future profits for technology companies, thereby crushing high tech stocks. The cost of these companies will rise. According to the past logic, when investors can get rich returns from risk-free treasury bond, they will not choose technology stocks.
Asworth Damodaran is a finance professor studying stock valuation at New York University's Stern School of Business. He was not surprised by the outstanding performance of large technology stocks this year. He said that confusing all technology stocks is too simplistic.
Don't use 'technology' as a synonym for growth companies anymore, "he said. In the 1980s, it can be said that, but now technology accounts for 30% of the market and is ubiquitous. As we all know, ATM machines are now large technology companies. No one is as wealthy as companies like Apple, Google, and Facebook, and Buddha has the ability to print money
Technology giants like Microsoft have accumulated a large amount of cash and reduced their liabilities, so many companies now benefit from higher interest rates. Companies like Amazon. com have expanded their business into cloud computing, video streaming subscriptions, grocery sales, and e-commerce, generating significant revenue from products that consumers cannot live without.
The surge in inflation last year tested the ability of companies to pass on higher costs to consumers through price hikes. Many young companies have not responded to recessions or escalating inflation, and are accustomed to readily available funds. Damodaran said that companies founded and developed in the era of near zero interest rates may find it difficult to withstand the economic slowdown that may be caused by the Federal Reserve's interest rate actions.
He said, "Are the Peloton members you purchased really non cyclical products? We will find that some of these products are really optional expenses
Sarah Malik
As the Chief Investment Officer of Nuveen, Saira Malik manages approximately $1.1 trillion in assets. Her clients say that about a quarter of their investment portfolio is in cash - which she says is a good bet - but that doesn't mean people should sell stocks.
She said, "The return on short-term bonds is at its highest level in decades. But the stock market clearly outperformed cash
Malik said that since the Federal Reserve began adjusting interest rates, some investors have been trying to bet on when the stock market will fall or rise, but she said that most people have failed and often choose to enter and leave at the wrong time.
Although Malik expects a mild recession at some point next year, she believes that the negative emotions surrounding the market and economy are somewhat excessive. The collapse of Silicon Valley Bank marked the beginning of a banking crisis and had a chain reaction, leading to the collapse of several regional banks. However, it has proven that the scope of this banking crisis is limited and short-lived, not a structural issue in the market.
She said that investing in non-traditional assets such as farmland, forest land, emerging market stocks, and private credit is a good idea, especially considering that government debt may increase, which will ensure that inflation remains high in the coming years.
However, she did not see any imminent crisis.
"I didn't see the foam burst," she said. "I'm more bullish now than bearish."
Mike Gitlin
Mike Gitlin became the President and CEO of Capital Group at the end of October. This company manages approximately $2.3 trillion in assets, of which over $800 billion represents assets managed by pension and other institutional retirement funds.
He is currently optimistic about the bond market. Short term interest rates are at their highest point in years, and when the Federal Reserve begins to cut rates, long-term bonds tend to perform strongly. Even lower rated corporate bonds will provide returns comparable to stocks, and such bonds have only been able to provide returns of a few percentage points for many years.
He said, "When the Federal Reserve ends raising interest rates, this window will open
He said that when it comes to bond investment portfolios, investors should not hold too much idle cash because a central bank interest rate cut will push up bond prices. In some cases, high-quality short-term bonds are offering yields close to 6%. High yield bonds have higher risks, especially in the event of an economic recession leading to defaults by some companies, but they can provide a yield of up to 9%, which can compensate investors who are willing to take on more speculative risks.
Gitlin said that although investors are buying short-term cash assets, such as money market funds, it is time to buy longer-term bonds because when yields decline, the price of long-term bonds increases even more.
Although the yield of 10-year treasury bond may fluctuate between 3.5% and 5.5% in the next few years, he does not expect the yield to rise significantly on this basis. But he also does not believe that interest rates will fall significantly soon. He said he expects the federal funds rate to drop to around 4.5% in one year, rather than zero.
He said that inflation is falling, the economy is slowing down, and the labor market is also cooling down. All these signs indicate that investors should buy bonds.