In April, we asked a similar question relative to interest rates – have they peaked? Our conclusion was the following:
“We believe that very lopsided sentiment (everyone thinks rates will continue higher) and the unusual performance pattern between interest rates and bank stocks (rates way up and bank stocks way down relative to the market) is reason enough to entertain the idea that interest rates may soon peak.”
For a few months, we seemed to be wrong. Now, our conclusion appears to have been more reasonable. Long-term interest rates are approaching mid-April levels. The Federal Reserve continues to increase short-term interest rates, but inflation expectations are coming down, and the market is anticipating slower economic growth. This combination is putting pressure on longer-term interest rates like the 10-year Treasury yield.
A key conclusion of our mid-April Two the Point was, “a cyclical peak in interest rates would include…better performance from Growth stocks.” While Value stocks have significantly outperformed Growth stocks in 2022, we think a leadership change is unfolding. We are seeing investors shift their focus from higher rates and rising inflation to slower economic growth. As a result, more cyclically oriented Value stocks appear to be losing momentum.
As the economy slows, investors will likely gravitate toward companies that can exhibit consistently strong earnings growth – investors pay for growth when it becomes harder to find. We have shifted our recommended asset allocation accordingly.
More from TWO THE POINT
- Two the Point — Worst to First – A Mean Reversion Rally in StocksIn our weekly video series, we highlight one observation we think is most important regarding the economy and the financial markets. This week we talk about a mean reversion rally in stocks.
- Two the Point — Corporate Revenue & Profit – Less than Meets the EyeIn our weekly video series, we highlight one observation we think is most important regarding the economy and the financial markets. This week we talk about corporate revenue and profit.
- Two the Point — Bonds 101: Why Do Bond Prices Fall When Interest Rates Rise?In our weekly video series, we highlight one observation we think is most important regarding the economy and the financial markets. This week we talk about why bond prices fall when interest rates rise.