Fed Finally Vanquishes Stocks From Asset Allocation Throne

For years, asset allocators had it easy: Buy the biggest American tech companies and watch the returns rack up.

Those days are gone, buried under a crush of central bank rate hikes that are rewriting the playbooks for investment managers across Wall Street. TINA -- the mantra that investors had no alternatives stocks -- has given way to a panoply of actual choices. From money market funds to short-dated bonds and floating-rate notes, investors are now locking in low-risk returns that, in some cases, exceed 4%.

The change has been underway since the summer, but picked up speed in September as investors came to terms with still-hot inflation data and a tight labor market that will force the Fed to pin rates at the highest levels since the housing crisis. After Chair Jerome Powell’s comments Wednesday, there’s little doubt the central bank expects at least a mild recession to curb inflation.

“We have gone through the inflection point of bonds offering more value than equities, thanks to the pricing in and delivery of large rate hikes, and a re-emergence of inflation risk premia in the bond market,” said Peter Chatwell, head of global macro strategies trading at Mizuho International Plc. “We would expect the earnings downside risks to make those equity risk premia even less generous in the coming months.”