The Q1 earnings numbers have kicked up a lot of dust across sectors and individual companies, which is good news for stock-pickers eager to prove their worth. For markets as a whole, though, I see little change in the underlying narrative relative to what I have been talking about recently. Equity investors remain focused on what policymakers are saying rather than what they’re doing, sticking with the idea that central banks, and perhaps even politicians at large, have their backs. Bond markets are nodding in agreement. Solid labour market data in the U.S., and a robust Q1 GDP print, have not dented market-implied expectations that the next move by the Fed will be a cut. And in the Eurozone, markets have priced out an adjustment in the deposit rate through 2021. Blackrock’s Rick Rieder summed it up neatly last week by referring to the asymmetric outlook for policy. I am paraphrasing, but the idea goes something like this: “If central banks raise rates, they will do so slowly and hesitantly. If they have to cut, due to tightening financial conditions and a slowing economy, they will do so fast and aggressively.” I would even wrap in fiscal policy here, though this admittedly tends to operate more slowly, and over a longer timeframe than monetary policy.Read More
One great quarter down, only three to go to wash away the horror show of 2018. The portfolio did well, though it is still bogged down by a number of single names which are beginning to look a lot like value traps, of the nastiest kind. I am, as ever, optimistic about redemption in coming quarters, but I fear that the retired Macro Man, a.k.a. Bloomberg strategist Cameron Crise, is right when he says that; “the sobering reality for asset allocators is that the returns of balanced portfolios are going to struggle mightily to approach anything like 1Q performance.” It won’t be as easy for punters from here on in, but they’ll do their best. Bond markets have taken centre stage in recent weeks, aided and abetted by significant dovish shifts in the communication by both ECB and the Fed. The result has been a heart-warming rally in both front-end and long-end fixed income, or a pain trade if you’ve been short, and the U.S. yield curve showing further signs of inversion. The 2s5s went a while a ago and now the 3m/10s is gone too, which, apparently, is a big thing. As per usual, economists and strategists are squabbling on the significance of this price action, and I doubt that I’ll be able to settle anything here, so I will stick with the grand narratives, which are tricky enough.Read More
Let’s spare a few moments of symphathy for the equity bears. The Q4 rout was supposed to have been an appetizer for a more sustained bear market, and by most accounts, the major narratives are still on their side. Excess liquidity indicators—chiefly real M1—and other leading macro-indicators look dire, and the hard data have predictably rolled over. They gave up the ghost in Europe a long time ago, and are now softening in the U.S. Even better for the bears, earnings growth is now slipping and sliding, a logical consequence of the sharp drop in the rate of growth in almost all main hard macroeconomic indicators and surveys.
Despite such a perfect set-up from the macro data, the equity market has rallied strongly at the start of the year, and is showing few signs of rolling over mid-way through February. There is still hope for the bears. If you are just looking at the headline data, it is relatively easy to dismiss the rebound at the start of the year as a reflexive rebound from the horror show in the latter part of 2018, a bear market rally to suck in the naive bulls before the next deluge. The idea of a bear market rally is still alive, but equity bears also now have to contend with a revival of their greatest foe to date; the global central bank put.Read More
It’s been a choppy start to the year, but last week’s price action added to the evidence that the bulls have regained control, at least temporarily. The MSCI World and HYG US equity are now about 8% and 5% higher, respectively, from their lows in December, and treasury yields are up across the board. The rebound has been broad-based, but European and EM equity indices have shown particularly promising signs, consistent with the fact that they have, after all, been much cheaper than their U.S. counterparts through the Q4 chaos. These headlines are good news, but at this point, I am not willing to treat them as evidence of anything but a reflexsive rebound in the wake of a horrific Q4. Short-term indicators suggest that a lot of fear already has been priced-out. The put/call ratio on Spoos it peaked at 2.7 SDs above its mean on December 27th, but has since plunged to -1.0 SDs. Normally, this would be a sign of complacency, at least in the very short run, but the put/call ratio looks more balanced on Eurostoxx 50, indicating that the picture for global equities as a whole is more neutral. Other indicators also suggest that the market can run a further. My first chart shows that that the crash in the U.S. stock-to-bond return ratio at the end of 2018 was similar to the plunge during the EZ sovereign debt panic in 2012, and well in excess of the Chinese devaluation scare in 2015/16.Read More