Welcome To A New Era

By: Kent Engelke | Capitol Securities

I do not think it is a stretch to write that the markets have officially entered into a new era. QE is now replaced with QT. QE lasted about six years and QT is expected to last for five years. How will all markets respond?

Perhaps the only accurate statement to write is that we don’t know. The pontifications will be great, but only history will dictate the outcome. The Fed’s balance sheet is at a record size and such a feat has never been attempted. Mistakes or missteps will happen. It is not a question as to if, but rather as to when.

As noted many times, the vast majority of bulge bracket firms have made bearish pronouncements before Wednesday’s anticipated announcement with Vanguard yesterday reiterating their heightened concern.

A primary component of all valuation models is corporate cash flow discounted by some interest rates. The higher the interest rate, the lower the valuation if everything else remains the same.

It is now widely known there is a great disparity between value and growth. For this discussion, I will define value as energy and the financials and growth as the technologies. Some benchmarks suggest the disparity between the two is as much as 40%, the greatest difference in almost a generation.

Hypothetically speaking, value should outperform in a moderate rising rate environment. Will there be a prolonged period of value out-performance comparable to the prolonged period of growth out-performance, ending only when all declared growth investing is dead just as many have today declared value as dead?

Yesterday, value outperformed closing nominally higher. Growth was down about 0.50%. Is this a harbinger of things to come?

Last night the foreign markets were mixed. London was up 0.17%, Paris was up 0.39% and Frankfurt was up 0.24%. China was down 0.16%, Japan was down 0.25% and Hang Sang was down 0.82%.

The Dow should open nervously lower. The 10-year is up 5/32 to yield 2.25%.


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