This post was originally published on this site
Investors seem to be getting a little too used to an accommodative Federal Reserve, according to Citigroup research.
“Several institutional investors have asked us repeatedly about the benefit of our panic/euphoria model in a period of QE,” or quantitative easing by the Fed, suggesting the market-sentiment gauge needs reconfiguring “to capture this new paradigm,” the bank’s strategists said in a Citi Research report from Monday evening. But a desire for such rejigging reflects “a zeitgeist looking to rationalize and normalize intervention rather than perceiving it as an unnatural force that could subside,” the Citi
C,
analysts said, in the U.S. equity strategy report.
The Fed began its massive QE program during the COVID-19 crisis last year, purchasing $120 billion of assets a month as part of its emergency efforts to support markets and the economy. Markets have roared back, with stocks reaching a series of fresh all-time highs this year.
“Too many asset allocators have focused on the FOMC’s willingness to drive up asset prices in order to force reflation rather than valuation criteria or sentiment warnings,” the Citi analysts said in the report. They pointed to the “seeming disconnect between fundamentals and share prices created by excess liquidity looking for a home.”
See: Archegos chaos signals ‘fear of missing out’ rampant on Wall Street, GMO’s Inker tells MarketWatch
Although the Fed left its highly-accommodative policy in place at its June FOMC meeting, some investors anticipate it could begin tapering its asset purchases by early next year as the economy continues its rebound from the pandemic. The central bank also kept its benchmark interest rates near zero, with Fed officials signaling a median forecast for liftoff in 2023.
The outcome of the FOMC meeting unsettled markets. Last week, “the Street tried to adjust to a potential risk averse stance if the Fed was not going to be as accommodating as has been the case the last 15 months,” said the Citi analysts.
Investors bought shares of mega-cap information technology companies — despite a broad economic reopening and “some worrying inflation signals” that typically would have supported more cyclical areas of the market, according to the report.
Read: Inflation scare? The stocks that perform best — and worst — when prices rise
Investors seem to have gotten comfortable with big tech.
“Large cap tech with resilient balance sheets became the new area for protection” in the downturn induced by the pandemic, as opposed to traditional defensive sectors beyond consumer staples such as toilet paper and cleaners. Meanwhile, growth stocks have been “very rewarding” over the past couple decades, with the tech-heavy Nasdaq Composite index
COMP,
outperforming the S&P 500
SPX,
the Citi report shows.
“Arguably, half of the fund management industry participants only know the growth style,” the Citi analysts said. “Unless one can truly build a new inflation regime change argument, it is hard to convince fund managers to do things differently.”
