Bullish Path for Stocks Paved on Midterms, Janus Henderson Says
(Bloomberg) -- Stocks in the U.S. will set fresh highs after midterm elections contained the prospect for any sharp breakout in inflationary pressures that might have sapped taking-risk appetite, according to Janus Henderson, which oversees $378 billion.
The Federal Reserve will be able to maintain its gradual tightening path and real rates will continue ticking up following last week’s midterms that created a dividend Congress, a more favorable environment for riskier assets than before the vote, said Ashwin Alankar, the global head of asset allocation at Janus Henderson.
“We could see another nice run in equities,” Alankar said by phone from Denver. “We don’t see any evidence that inflation might get out of control and that’s pro risky assets.”
Alankar’s outlook is informed in part by a model that uses signals from the derivatives market. It examines options prices across a range of different asset classes to determine what the market is currently expecting in terms of upside or downside to that particular asset over the next 60 days.
His view on price pressures are mirrored by the five-year breakeven rate, which represents investors’ view on the annual inflation rate through 2023. It’s dropped to 1.9 percent, close to the lowest since January, from a 2018 high of 2.19 percent. On Wednesday, data is forecast to show U.S. consumer inflation probably rebounded in October after easing in September.
“With the split government in the U.S., it’s a less inflationary environment,” he said. “It’s unlikely Trump will be able to go on this huge fiscal spending campaign, then the Fed likely can continue on its gradual path to hiking, hence real rates can continue to rise gradually. The market can handle a continued gradual rise in real rates.”
Higher stock prices and rising interest rates will be met with greater levels of risk, Alankar said. He expects the Cboe Volatility Index, or VIX, to stay in the mid teens -- it shut at 17.36 on Friday, above this year’s average. U.S. equities are presenting the best opportunity to Alankar, who said he also likes stocks in Japan and emerging markets.
“Over the last four to five months, the level of downside risk has risen from very, very low levels to more normalized levels,” he said. “The conclusion that we draw is that the days of this great moderation that has characterized capital markets since 2008 might be behind us.”
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