Posts tagged growth stocks
Value Strikes Back

That screeching sound you heard in equities last week was caused by a train wreck underneath the surface of a steady uptrend in the market as a whole. The hitherto outperformance of growth and momentum reversed sharply, a move that coincided with a steeper curve and a tasty outperformance of value and small caps. The dramatic rotation across equity sectors, and the steepening yield curve, vindicate the story peddled on these pages recently. But the question is whether this is the beginning of a sustainable shift in markets, or whether it’s merely an invitation to buy the dip in an eternally winning strategy? It’s difficult to say. Robert Wiggleworth’s expertly written overview of the flurry in the FT certainly suggests that strategists have taken note, equating last week’s gyrations to the so-called “Quant Quake” in 2007. Apart from the fact that the event is significant enough to merit at least a small footnote in modern finance history, the quotes garnered by Robin indicate that strategists are at least mulling the idea that the shift has legs. This, in turn, presumably means that they’re advising their clients to run with the reversal, which almost surely would do nicely for the portfolio

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Not long now

Too many themes have caught my attention recently, so I’ll stick with some points on markets this week, leaving my more discursive thoughts for later. I think two things currently are serving to make sure that markets resemble deer caught in the headlights. For starters, Mr. Trump’s Twitter feed is keeping everyone on edge, whether they like it not. Markets clearly are moving as he tweets—no matter how crazy the statements—and to the extent that the president is using his executive powers to affect policy, he is liable to announce it on Twitter, even if he does decide not to go ahead. This makes Trump’s twitter feed a bit like nonfarm payrolls. Everyone knows that it is a lagging indicator, that it is heavily revised, and notoriously volatile due to seasonal adjustment and sampling issues. Still, knowing the headline in advance can make you a lot of money. In short; traders have to stay alert to Mr. Trump’s volatile ramblings. Secondly, markets are waiting for the decisions by the Fed and the ECB later this month. Further easing is all but guaranteed from both central banks, but expectations are elevated, increasing the risk of a disappointment. In any case, it is fair to say that whatever they actually do this month, the guidance from messieurs Powell and Draghi will be just as important as the actual actions taken by the FOMC and ECB.

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The Grand Finale

Let me run a story by you. The dollar is rising against both its EM and DM counterparts, and U.S. equities— predominantly growth and tech—are gunning higher. By contrast, EU equities are lukewarm, and EMs are outright struggling as balance-of-payment stress take down one domino after the other. In bonds, the U.S. front-end is held up by expectations that the Fed will keep trucking, while the belly and long end are edging sideways. In other words, the U.S. yield curve is, still, flattening. Finally, all measures of global macro-liquidity have rolled over; real M1 growth is falling, and CB balance sheet expansion is kicking into reverse. To boot, most other leading indices also are exhibiting weakness. If this doesn’t sound familiar, it means that you have been living under a rock this year. I have been recounting this story for several months, and I am getting tired of it. But we haven’t yet had the grand finale so it’s probably too early to abandon it, as much as I would like to. In summary, I think we are due a fall in U.S. bond yields, potentially in both the 2y and 10y but almost certainly in the latter. I reckon that this happens alongside, or right after, a final moonshot in the dollar. It should be a cathartic moment for markets, setting the stage for a different story.

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Information Overload

Sometimes when you’re faced with too many choices, the best thing is to do nothing at all. When I look at markets, I sense that many investors are thinking along the same lines. If true, I have sympathy for it. In the U.S. economy, the news flow has invited contradicting conclusions. The February NFP report in delivered a hawkish headline, but sluggish wage growth and a higher labour force participation rate suggest a goldilocks interpretation. It is similar in the global economy. We have the promise of a fiscal stimulus-boosted U.S. economy growing close to 4% adding further momentum to a synchronous global upturn. But data in the Eurozone have disappointed recently, and investors also have to count the risk of a tit-for-tat trade war in tariffs. Geopolitics, as always, loom on the horizon too.  In FX markets, we are still debating whether reckless economic policies in the U.S. will drive the dollar lower or whether Make-America-Great-Again™ will revive the dollar bull. A wider twin deficit, in principle, could deliver both. We have also been discussing the Libor OIS spread, Italian politics, and of course, the ongoing tragedy of Brexit. I view markets through narratives, but I struggle to come up with one that captures all of the above.

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