Market sell-off

Today’s topics

  • Bullard
  • Broader market
  • Performance
  • Yields
  • Retail sales


You didn’t have to go far to find the specific source of market unease post the recent FOMC, and the “talking about talking about” tapering tagline.

Below is James Bullard citing a much more near term trajectory, although one that is inline with the updated “dot plots” in turn suggesting that he, and others at the Fed at the minimum, agree.

Broader market

The market, as we often note, has an interesting habit of not seeming to care, about a well flagged event, right up until it does. And then it cares very much.

Financials, resources and consumer discretionary stocks were hardest hit, with the market overall falling almost 2%


We are underweight Financials, Consumer Discretionary, and Materials, and as such our direct equity portfolio had a good day (outperforming by ~30bps).

Our overweights to defensive, low vol equities like Health, REITs, Staples, Tech put us in good stead. The main takeaway is that on a material down day our fund had a better drawdown experience, which is what we are after. Participate in the upside, outperform on the downside.


The fall in yields has been dramatic. Recall that post the hawkish FOMC they spiked higher, as expected given prospective acceleration in the tightening schedule, and then fell as the focus shifted towards the downside aspects of premature tightening, which would result in lower growth, and lower inflation, and thus lower yields down the track.

We wrote in an earlier note that we think this is wrong, and that whilst the bond market is a generally good guide, and we (and all) do well to heed its signals, in this particular instance we think they’ve got the trade wrong.

The economy is healthy, and $20 trillion of global fiscal stimulus should be able to raise the expected future path of interest rates, particularly with monetary policy not specifically aimed at unwinding it.

Thus, there’s a couple potential takeaways.

At a duration of around 7 years, the fall in yields over the past few days is almost worth a year’s prospective total return. As such, we are thinking of modestly trimming our Government bond allocations.

Second, the lower yields and hawkish Bullard causing markets to sell off is almost certainly viewed as a good thing by the Fed. Certain pockets of the equity market, and risky asset market (commodities) are almost certainly overvalued, and better (from the Fed’s perspective) to see some froth come out the market than to cause a larger problem due to resource misallocation later.


The preliminary retail sales print was a fair miss to market expectations. You can barely see the 0.1% print on the bar plot below.

As we’ve discussed before, there should be no surprise, the whole sector had a once in a lifetime pull forward in demand, and that demand in now transitioning to other areas, and, some of the pillars of support (like fiscal stimulus to households) are gone.

It should be more than a note of caution, to the discretionary multiples shown below.

Which are at or near record highs, in a majority of instances, on a range of frames.

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