With the Fed no longer focused on pushing asset prices higher, gains in stock and bond prices will be harder to come by, according to Barclays’ latest flagship quarterly research publication, Global Outlook: No longer a rising tide lifting all boats. Over the past four years, the success of quantitative easing has created a favorable market environment; however, with Fed “tapering” looming, better economic growth will likely be needed to drive stocks significantly higher.
“The Fed has achieved its QE objective of raising asset prices and further significant price appreciation would risk another asset price bubble,” said Larry Kantor, Head of Research. “For the first time since the crisis, stocks and bonds are likely to move in opposite directions, with the ups and downs in economic activity returning to center stage. This raises the bar for successful investing, since achieving mediocre growth will no longer be enough to push equities higher, compelling us to be less bullish on developed market equities.”
With Fed tapering on the horizon, however, the market may have gotten ahead of itself by pricing in a significantly closer onset of monetary tightening. While the Fed would be justified to declare victory in its quest to push up asset prices, it is more difficult to make the same argument for the economy. Although the unemployment rate is falling, near-term prospects for growth in the US remain challenging, given the ongoing effects of fiscal tightening. Moreover, evidence of a pickup in global growth outside the US is unlikely to emerge in the next few months.
If this is correct, for the first time in a while, some areas of fixed income will be more attractive than major equity markets from a tactical perspective. This is particularly true for assets that have suffered most from the recent market turmoil, including agency mortgage-backed securities and high yield corporate bonds. A number of EM equity markets fit into the same category, including those in Mexico and Korea.