The ASX 200 [ASX:XJO] share price is down again today, marking its third losing session in the last four days.
With the ASX generally following US market action overnight, here’s a quick explainer on why the ASX is down today:
- Fed Chair Jerome Powell’s speech underwhelms
- Bond yields making future tech/growth earnings less attractive
- Outlook for the ASX going forward
Let’s start with what Powell said today.
Powell’s speech underwhelms
Here’s a key passage from his speech, which was printed in The Australian Financial Review today:
‘We monitor a broad range of financial conditions and we think that we are a long way from our goals…I would be concerned by disorderly conditions in markets or persistent tightening in financial conditions that threatens the achievement of our goals.’
This was followed up by another important comment:
‘It’s always the case that if conditions do change materially, the committee is prepared to use the tools that it has to foster achievement of its goals.’
What to make of this guarded language?
Well, for one, since the market watches Fed comments so closely, Fed chairs have a tendency to speak in riddles.
But it’s all about expectations, and the market was likely hoping for stronger language around yield curve control.
Here’s what that means.
Bond yields spiking means tech/growth earnings less attractive
You can see how the yield on US 10-year Treasuries is going right now:
That’s a pretty steep ascent off of the floor put in place mid-year.
‘The 10 Year Treasury Rate is the yield received for investing in a US government issued treasury security that has a maturity of 10 year[s]. The 10 year treasury yield is included on the longer end of the yield curve. Many analysts will use the 10 year yield as the “risk free” rate when valuing the markets or an individual security.’
In a nutshell, a rise in yield means the future earnings of growth and tech stocks are less attractive to investors.
Hypothetically, the Fed could step in to flatten or control the yield curve, as Japan has done for nearly five years.
That would be a boon to growth stocks again. However, today around the ASX, the moves in the US are causing a sea of red.
But I’ll explain why, despite a few losing sessions, I don’t think the ASX fall means you should panic.
ASX 200 outlook share price going forward
No one seems to care about bonds, until all of a sudden everyone cares about bonds.
I’d suggest this is a bit of a psychological fake-out, which the Fed is comfortable with.
Powell’s comments were effectively like an overly generous parent not handing out lollies for the first time.
After markets started to get quite frothy, a correction was always on the cards.
Things don’t go up in a straight line forever.
It’s a bit of a paradox.
US job numbers are slowly getting better, meaning the economy should improve, meaning earnings should improve for more traditional value stocks.
This could be the beginning of a value renaissance over in the US, and bond yields are just the lever for that pivot.
As such, a similar story might play out on the ASX.
Beaten-down companies sold off in favour of shiny new things could slowly come back into vogue.
Given that many of these companies are high up the ASX rankings (i.e. in the ASX 200 or close), this could mean the run continues.
Albeit with less action in the small-cap space.
Around the market, I’m noticing a lot of the more speculative companies cooling off, but I also don’t think that’s going to mean value wins and growth loses.
Maybe value wins more, and growth stocks win slightly less.
Powell also firmed up his commitment to keep rates near zero, which is unsurprising.
This is exactly why you should listen to what Greg Canavan, editor of The Rum Rebellion, has to say about investing during ‘life at zero’.
His central thesis is that a combination of inflation and low rates will flush cash out of savings and into the market over the next three years.
Being able to pick where this cash could flow will be particularly important.
I highly recommend you check out Greg’s latest research.
For The Rum Rebellion