Friday was a fascinating day, because this was the day when the markets made up their mind that growth is good, said Jeff Korzenik, chief investment strategist at Fifth Third. But what is particularly interesting is that the markets are not afraid of the taper, as exemplified in the bond market today. This has a lot of implication for sector selection and where rates can go, which is the right call, Jeff noted.
Normally Treasury yields would not go higher if tapering is happening, irrespective of whether it is good or bad. Asked to comment on it, Jeff said tapering had relatively little impact on the bond market.
Clearly quantitative easing/asset purchases have continued even as Treasury net issuances have declined and that signifies supply and demand is not the dominating effect anymore. After decades in the bond market, supply and demand seem to be a tertiary factor. What’s really important is nominal GDP and the markets are trading-off of a 4-year average; bonds are going higher because there’s a growth in nominal GDP again. That being said, there’s unlikely to be runaway yields in the near term given the level of inflation so far, and the markets have finally figured that out, he observed.
Asked if that means a continued rally in the stock markets, Jeff answered in affirmative. Modest increases in the (Treasury) yield won’t destroy the stock market rally as long as there’s money growth and earnings growth, which Fifth Third sees on the horizon, he said.
Asked if the markets are witnessing the clichéd Goldilocks situation, Jeff answered in affirmative, saying the markets are likely to witness a Goldilocks situation for six months. The next year is going to be a little more challenging with a whiff of inflation coming in the second half of 2014, he noted.
When questioned which are the sectors that are likely to do well going into 2014, Jeff said at the current pace of economic growth, industrials look attractive. The technology sector will also receive a boost due to enhanced capex (capital expenditure), while consumer discretionary will fare better as more people join the work force in the long run.
There could be one contrarian play though; if the markets figure out that bond yields are not going to go up soon, utilities may give good returns as relative to bond yields, they look attractive. Utilities are likely to witness earnings growth as the economy improves, which makes them attractive, Jeff concluded.
You can watch the video here.