Economics, financial markets and the occasional fiction
02
Alpha Sources Blog
Data for charts are sourced from FRED, OECD, Eurostat, IMF, BIS, Market Watch, Yahoo/Google Finance, Investing.com, COT, Bloomberg or Quandl unless otherwise stated.
Investors have found it difficult to resist the temptation to become armchair generals in response to the recent flurry of geopolitical volatility. I have some sympathy for that. Political experts told us that Mr. Trump would mark the beginning of a new U.S. isolationism, and even speculated about the emergence of a new Monroe doctrine. The president's "America First" discourse, the statement that NATO is obsolete, and the rapprochement to Russia were all pivots watched ominously by other world leaders, especially in continental Europe.
This story, however, increasingly feels like ancient history.
The bad news is that investors once again has to play armchair generals in the next few sessions as they try to gauge the importance of the Mr. Trump's sudden decision to put his foot down in Syria. There are no easy way to break this to investors. There is a lot stuff going on and even more well-minded "experts" who are ready to tell you what to do about it. The good news is that I am going to spare you my hot takes on this occasion, because I am going on holiday. My destination is Madrid, so please do look me up if you want a cerveza. I can most likely be found in one of El Prado's majestic halls. Assuming you lot haven't started a nuclear war and blown me to smithereens, I hope to be back next weekend with some more market-related meat and potatoes.
The first quarter was a pleasant one for investors. It was difficult not to make money on the long side in equities, while it remained slim pickings for bears. Bonds and credit rallied too, albeit less vigorously, and commodities also pushed ahead. The USD-bull story, however, fell by the wayside. My two first charts put some numbers to this. The first shows the total return-to-date for the main asset classes, and the second adjusts for volatility. Equities did the heavy lifting—with EM on top and Japan trailing—but the 8.2% jump in gold is also interesting. Not many have really talked about this, but it has benefited the portfolio in an environment where its core equity positions has been left behind by roaring benchmark indices. High yield credit in the U.S. has also pushed higher without much ado, while commodities have trailed. U.S. govvies have underperformed although, the 10-year bond reasserted itself towards the end of the quarter. Finally, king dollar was demoted to Jester.
I am short on time this weekend, which is probably a good thing given that I have really struggled to share the excitement over last week's events. We had the swoon of the S&P 500 and its first 1% daily decline in more than <insert number here> days on Tuesday. Overall the index had temerity to post a 1.4% decline on the week, the biggest fall since the first week of November. It was with a tinge of embarrassment that I watched the overreaction of my fellow equity investors on both sides. For the bulls, this was the buy-the-dip of a lifetime and for the bears it was the signal that the bull market had come to an end. In truth of course, it was evidence of neither, although I suspect that the bulls will be the ones sleeping with most unease.