Tighter policy rates are now scrambling the mindset that ‘There Is No Alternative’ (TINA) to equities, Morgan Stanley said in a report.
Meanwhile, for much of the last 12 years, it was common to hear some variation of ‘TINA’, the idea that one needed to be long stocks and bonds because cash offered so little.
Low yields were not the primary reason why stocks rallied over that time; global equities and global equity earnings simply rose by the same amount (100 per cent), the report said.
“But was TINA a helpful mental crutch for markets, especially in times of stress? Absolutely,” the report added.
“These tighter policy rates are now scrambling that mindset. Six-month US T-bills yield about 3.75 per cent and cash and short-term fixed income increasingly offer lower volatility and high yield within a cross-asset portfolio.
US 1- to 5-year credit yields 4.9 per cent against an S&P 500 earnings yield of 5.9 per cent. But over the last 30 days, the S&P 500 has been 5.7 times more volatile, Morgan Stanley said.
In short, investors now have a number of higher-yielding, lower-volatility alternatives if they want to step back from the market.
The report said this helps to support US dollar where yields are the highest), keeps cautious on US equities and leads us to see credit outperforming equities in the US and emerging markets.
Psychologically, it means adjusting to a world where the Fed no longer seems as friendly and market supportive. Over much of the last 12years, with inflation undershooting targets, central banks were often happy to push for easy policy when conditions looked tough. But with inflation now high in the US, the UK and the eurozone, that dynamic has changed.
Prior to last week, the ECB had never executed a 75bp rate hike. Market pricing now suggests a high likelihood that it will do so in back-to-back months, Morgan Stanley said.