Risk assets have had a tough year as the Federal Reserve (Fed) started aggressively raising interest rates to battle the ever-rising inflation in the US. A similar occurrence took place around the world, with central banks looking to eradicate inflation to the detriment of risk assets.
Furthermore, fears of a recession are leading portfolio managers to rethink and shift their portfolios, where analysts now see a 60% chance of the US sinking into a recession. Meanwhile, the Founder and Portfolio Manager of the Satori Fund, Dan Niles, joined CNBC’s Squawk Box on September 26, to discuss the markets.
Niles sees multiples in the tech sector as being very high and being the ‘last shoe’ to drop before markets see the real bottom.
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“The multiples are very high in that sector, in particular. I think that’s the last shoe to drop, before we hit an ultimate, real bottom, sometime in the middle of next year during a recession. And the Fed has stopped raising and maybe starts thinking about cutting. But you gotta wait until the Fed has stopped raising rates, and we’re not near that point yet.”
Doling out economic pain
With the interest rate hikes, it seems as if the Fed is doling out economic pain, but on the other hand, throughout history, raising rates was a way to fight inflation while simultaneously slowing economic growth.
Moreover, when interest rates rise, market participants should increase the discount rate they use to determine the value of future cash flows or interest payments tied to a risk asset, such as stocks or bonds. While high rates and high inflation pressure future earnings, lower valuation has to be given to such assets.
While inflation has dropped compared to the 40-year highs seen over the summer, it seems more pain has to be dished out before a ‘recovery’ can be had. For investors currently not in the markets, analysts so far seem to suggest a period of waiting.
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