I’ve recently come back from a week on Ibiza—the smaller and cooler of the main Spanish Mediterranean isles—enjoying what has to be one of the most fantastic climates on earth. I come back to the realisation that I could have been more spendthrift in the pool bar despite its grotesquely overpriced drinks and snacks. Stocks are flying, credit spreads are narrow and volatility has plunged to a new low for the year. My relatively defensive portfolio is currently tracking a punchy 3.8% monthly gain for May, just shy of the 4.4% rise in the S&P 500. Long may it continue. I will have more to say about this in due course, but in the first instance, my recent work suggests that this rally has one strong tailwind on its side; the cyclical picture in the global economy has improved. My measures of global cyclical activity hit a new high at the end of Q1, and into Q2, from a trough last year, and cyclical equity returns are now re-accelerating, after softening a touch at the start of the year.
Read MoreI use three indicators in my work and analysis on the blog to describe the global business cycle; a weighted average of growth in global industrial production and trade, compiled by CPB, the global composite PMI, and a diffusion index of OECD’s leading indicators. Strictly speaking, the CPB data in this context are a coincident indicator, while the PMI and OECD LEIs are short-leading indicators. What’s the difference? At the moment the CPB data, updated through February, provide a guide of what happened at the start of 2024 and perhaps an early read on the Q1 GDP numbers, which have just started to trickle out. By contrast, the PMI and OECD LEIs are supposed to offer an early indication of what will happen in Q2. The distinctive lines between these definitions are fuzzy, so I tend to see these three as separate gauges of where global economic activity—with a weight towards developed markets—is right now.
But how do these indicators relate to the equity market? Let’s try to find out.
Read MoreFinancial market pundits are a bit like dogs chasing cars; they wouldn’t know what to do if they caught one. And so it is that after trying to figure out whether the economy and markets would achieve a soft landing in the wake of the post-Covid tightening cycle, no one quite knows what to think now that the soft landing appears to have arrived.
Let’s list the key requirements for a soft landing.
Read MoreI am coming into 2024 in a decent position. My MinVar equity portfolio, designed to extract the best from both worlds in the perennial battle between growth and value, has done largely what it is supposed to do. It has offered positive, but below-beta, returns with below-beta volatility, the latter which means that your humble blogging investment analyst has been able to sleep calmly at night. In bonds, I moved my exposure onto the front early in 2023 in line with the yield curve inversion. At this point I see no reason to change that strategy. Why buy negative carry in duration when you don’t have to? There will be a time to take a strong bet on duration, but I can’t really see that point until either the front-end has collapsed under the weight of global central bank easing, or unless the curve rinses everyone by bear-steepening sufficiently to restore a positive roll and carry in the long bond. In other words, I don’t see any reason to buy duration as long as the curve is still deeply inverted.
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