Thu 16 Jun 2022
Ostensibly, everything about the latest rally in equity markets screams “Bear Market rally”. After all, how can we call an end to the Bear Market when Quantitative Tightening, the great process to unwind some of the Fed’s recent purchases, hasn’t even begun?
However, we should not forget that the Fed continues to be the “only game in town”, and that asset managers lost the right to cry “Bear Market Rally” in 2013, when everyone was certain that Quantitative Easing would come to an end and markets would revert to crisis form.
If we compare the point at which S&P 500 rebounded (near 4150 points at the end of May), and where the Fed’s assets are projected to be (assuming full quantitative tightening) by next summer, we can see that markets have effectively already priced in a year’s worth of quantitative tightening. Nevertheless, one can’t say for certain that we have reached a bottom. The S&P could well fall another 800 points, towards significant technical levels which coincide with level of assets held by the Federal Reserve before the latest round of QE. In other words, markets have priced in some quantitative tightening, but not a full reduction of assets to pre-Covid level. For that to happen, we would need to see a significantly more hawkish Fed, and the minutes from the latest central bank meeting suggest that this is not yet the case. The rebound in bonds after the US 10-year reaching 3% means that markets have priced in this year’s rate hikes (and possibly next year’s rate hikes as well). Notably, the global bond benchmark yielding 1% over long-term inflation is certainly reason for pause.
We are now moving to the phase of the cycle where at least some of indicators of a financial recession begin to flash red warning signals, but the economic recession has yet to come.
By now, members of the Federal Open Markets Committee will know that even their most constrictive policies will have little effect on inflation and that the labour market is very tight. Therefore, their principal concern will be growth. The quarter’s results by Amazon and Wal-Mart were disconcerting enough to raise some red flags in the Fed. Meanwhile, the US housing market continues to lose steam while prices remain sticky – the usual mark of a disconnect between buyers and sellers imminently before prices eventually cave.
So, markets have retrenched enough to price in some quantitative tightening. At the same time, economic news has taken a sufficiently pessimistic turn to, at the very least, sow the first seeds of dovishness that should kick off the next cycle.
– George Lagarias, Chief Economist
As markets celebrate Congress’s decision not to self-immolate, investors should reflect on how low the bar for rational behaviour by policymakers is, and whether risk premiums reflect the present political and geopolitical tectonic shifts. Despite the recent stock market rallies, which is really a one sector story, technology and AI, risks remain high.
Our key theme since the beginning of the year is that the world is a volatile and unpredictable place. To be fair, this could have been our theme every year since 2006 and we would have still hit the mark. But this is not garden-variety volatility.
If investors collectively believe in the second coming of QE, then at some point, we should expect a severe market retrenchment. But what if markets are more sanguine than that? What will be the major catalyst, to unleash market forces for risk assets to escape their narrow bands?
One of the key risks we persistently flagged in the second part of last year has been the swiftly rising risks in the bond market. Bond risks are not like equities. They are not linear, which means that they can escalate very quickly.
Even if we recognise that the world has profoundly changed, we try to analyse it with the eyes of the past. Instead of trying to forecast with the past’s eyes, we need to acknowledge how the present has changed, and develop the right tools to analyse the future properly.
The British Autumn drama entered its third act, and the worst seems behind us. The UK has what may pass for an equivalent to the Euro-crisis technocratic governments in Italy and Greece. That particular playbook would, at this point, see market volatility ebb. Having said that, the play usually hides an unsurprising fourth act.
Quantitative easing is the ultimate tool to pacify markets. Once it was applied with success, it became very difficult for policymakers to consider other options to restore market calm. They can stop QE, and even reverse it for a while, but the moment markets become too wobbly, they will not hesitate to deploy it.
Investors worry about equity volatility. However this is, by and large, transient. Instead, we should all be cognisant that we are in a paradigm shift. If growth falters and inflation doesn’t break, the central banks’ mandate and independence may be up for review.
At the end of June our Investment Committee convened to decide the asset allocation for the third quarter. There were no changes to asset allocation, however some duration has been restored to the fixed income allocation. We continue to hold a neutral position in equities, an underweight position in fixed income and an overweight position in alternatives.
It takes a confluence rather than individual risks to cause catastrophe, as any veteran of the Global Financial Crisis will attest. We believe that there’s a mounting probability that we are seeing such a confluence of risks now, one that could significantly hurt growth:
Cancelling a person, right or wrong, is no small feat, and there are repercussions. “House of Cards” was a series that literally made Netflix, yet it features much less prominently after Kevin Spacey’s cancellation. The cancelled actor/celebrity will have worked with other people, who will now see their incomes reduced as works of art are withdrawn and themselves smeared by association.
The Omicron variant was not much of a surprise. We have already seen many mutations of Covid-19. But a hawkish Fed? We haven’t experienced one since 2018. As the potential of a new outbreak emerges, Fed Chair Jay Powell surprised markets by insisting that the US central bank would accelerate asset purchase tapering in December. Instead of customarily intoning the ‘Fed Put’, as per usual in times of crisis, Mr. Powell added fuel to the fire, causing unusual, for December, equity volatility.
A new, more transmissible variant, and a surprisingly hawkish Fed brought some of the most volatile trading days in months.
What do the British budget and COP 26 have in common? The -possibly inevitable- return of ‘Big State’. The 1980s ushered in an era of lower taxes and reliance on consumers to fuel growth. The Covid-19 pandemic, twelve years after the global financial crisis, followed by at least a decade of ‘Sustainability Economics’ may put […]
Seen from a bird’s eye view, the Fed has turned more hawkish in preparation to taper asset purchases. As a result, markets are now more prone to respond with volatility to rising risks, of which there’s no shortage: From soaring natural gas prices to impaired supply chains threatening consumers and businesses; from a new status […]
For a long time our central theme has been the disconnect between the real and the financial economy. Nowhere has this disconnect been mademore clear than in the Fed’s communication in August. The bullish economic outlook clashed directly with a dovish approach on interest rates.Actions speak louder than words, however, and it is becoming apparent […]
Visibility about the future is as low as it has ever been. In recent memory it is difficult to recall a market and economic environment with such low degree of consensus amongst investors and business leaders. Even as vaccination is bringing the world closer to the end of the pandemic, uncertainty is everywhere to be […]
I remember when liberal capitalism failed. The night of Friday 12 September 2008 no one was particularly worried. Barclays would rescue Lehman Brothers, like Bear Stearns was saved before it. On Monday morning we got the news. A Wall Street icon was the first victim of a year-long credit crunch. If one giant can fall, […]
April saw a de-escalation of bond yields and a further rise in stock market prices across the board. Risk assets began to gear up for the acute phase of the economic rebound, as vaccinations progress in most G7 countries, especially the UK and the US. Currently there are three big themes we think all investors should be watching. Find out here -
Global economic divergence has caused a surge in input prices evident in various Purchase Manager Index reports as well as producer price indices. In early February markets began to price in the probability of higher inflation. The long end of the yield curves (where inflation lives) rose, while the short end (affected more by interest rates) remained at the same levels.
Late in 2020 equity markets climbed on the anticipation of vaccinations and are now consolidating at higher levels. They are now trading sideways, patiently waiting for economies to open and earnings to catch up to heightened valuations. In the first two months of the year, equities have gained a healthy 2.6% (though less than 1% in GBP terms). Nevertheless, for all the excitement about vaccines and the impending reopening of the global economy, investors understand the exceptional equity performance since last year and, in fact, risk asset performance in the past twelve, is primarily owed to the ability of central banks to absorb risk. Central banks have been, and continue to be, the “only game in town”. The cornerstone of their ultra-accommodative policy has been the absence of inflation, which would compel them to adhere to their mandate and tighten money supply in the real economy, to the detriment of the financial economy.
Is this a bubble? Is it safe to invest at such high valuations? This constitutes 90% of client questions these days, and for good reason. It seems outlandish that stock markets are sky high while the global economy is having its worst quarter since the second world war. The answer, the House View we put […]
November featured plenty of good news for markets: The US election returned multilateralism to the Oval Office, Covid-19 vaccination is set to begin before the year’s end and S&P 500 companies have surpassed earnings expectations. In the background, central banks have vigorously reaffirmed their commitment to keep markets lubricated and the mounting debt cheap. It […]
Dear reader,This note was written mid-day on 3 November, just a few hours before the US presidential election result. Naturally, we were tempted to delay, to get a clearer view of the earth-shattering events surrounding the world’s biggest economy and longest standing democracy. However, we decided to consider that the US presidential election could be […]
Covid-19 comes at the back of 11 years of sluggish growth, rock-bottom interest rates but absence of inflation, negative global capital investment, manifest income inequality, stagnant wages and low consumer confidence levels, often dubbed “Secular Stagnation”. It is more of an understatement to say that these pressures were “greatly exacerbated” by the pandemic, and probably more accurate to say that the additional strain of the worst quarter for economic output since the end of World War II brings significant dangers to the stability of the global economic and financial systems.
In a decision for the history books, the US Federal Reserve, the world’s de facto central bank, abandoned a hard 2% inflation target in favour of a more flexible regime, attempting to prevent deflation resulting from secular stagnation exacerbated by the persistent COVID-recession. Inflation has finally been chosen as the weapon of choice against mounting […]
For the better part of the last three years the core of our investment policy has been simple: “Don’t fight the Fed”. As accomplished economist Mohammed El-Erian put it, Quantitative Easing is not the biggest game in town, it is rather the only game in town. Prices for risk assets are almost completely dependent on […]
The “right” fundamentals Often the first thing we are taught about something, especially if it comes from someone with authority, like a parent, a teacher or our experienced financial adviser, is taken as a “fundamental” truth. In psychology, this is called the “primacy effect”. Any other “truths” that contradict or seek to modify that first […]
Read our full monthly here Should we even be investing in this “crazy” market? Volatility is one of our biggest enemies in investing. It is very difficult to wake up one morning and look at a 20% drop in one’s life savings, a move that may have happened in a matter of days. An inevitable […]
The month in review: March Market Meltdown Q1 2020 saw the worst quarter for risk assets since the Global Financial Crisis as the dual shock of the COVID-19 pandemic and the Saudi Arabia-Russia oil price war wiped out equity markets and pushed credit spreads higher. Capital fled to the sovereign bond market with Treasury yields […]
Monthly Market Update Read our full Monthy Market Update March 2020 The month in review: COVID-19 disruption supresses risk appetite February was a tale of two distinct periods. Initially, with the Federal Reserve and the ECB printing money and an economic slowdown more probable than an imminent recession, global stocks continued to climb, with major […]
Read our full Monthly Market Update February 2020 The month in review: Coronavirus fears weigh on equity markets Despite a positive start to the year, January was a negative month for risk assets. Earnings marginally outperformed expectations in the US, with Amazon and Apple rallying on stronger than expected revenue growth and J.P. Morgan posting […]
Read our Full Monthly Market Update Global economic data is mixed. On the one hand, leading indicators and trade indices suggest that the global economic deceleration might be ending, and growth bottoming out, at least for this part of the cycle. On the other hand, manufacturing data persistently indicates contraction, especially in capital goods orders, […]
Markets welcomed signs of an easing in geopolitical tensions in October, with risk assets generally outperforming traditional safe havens. The US and Chinese authorities moved closer to agreeing a partial deal on trade, while the UK once again edged back from the precipice of a no-deal Brexit. Global central banks reiterated their dovish stances and […]
Read our full Monthly Market Blueprint October 2019 Global economic data suggest that the slowdown in global manufacturing (especially capital goods) is accelerating, and the services sector is now following this trend. The US has joined the cohort of large countries which now see their economy slow. Inflation remains at bay and unemployment in developed […]
Read our full Monthly Market Blueprint Sept 2019 •Global economic data continue to indicate contraction in global manufacturing and a slowdown in services. The US has joined the cohort of large countries which now see their economy slow. Inflation remains at bay and unemployment in developed markets is near all-time lows. Yet consumption is dented […]
According to data from the Financial Times and Bloomberg, investors have withdrawn more than £20bn from UK equity funds since the Brexit referendum. The number dwarves the £4bn estimated net inflows from ETFs during the same period. Outflows from funds and inflows from ETFs suggest that the “slow money” is moving away from UK equities, […]
The chart below shows the range of returns across top nine countries in the MSCI Emerging Markets index by market capitalisation. Combined they make up 88.6% of the indexas of the end of March. The vast majority of emerging market equity funds use this as their benchmark. The largest constituent in the EM index is […]
In the past few decades, one of the policy decisions that were key for investors was central bank independence. In the past, central banks constituted the arm of the Treasury. Run by top notch economists, their ability to review economic conditions independently has given them the power to reduce economic volatility by making sure that […]
Global economic data for June indicated that the global economic slowdown continues. Pockets of resilience can still be found where domestic demand is strong, but where external demand is driving the ecosystem, weakness persists. Data out of China have somewhat stabilised but are still soft. Weakness out of Europe and Japan indicates that the rebalancing […]
Global economic data was still mixed in May. A resilient service sector and weak manufacturing suggested that, while internal demand for most countries continues to support the local economies, external conditions remain weak, affecting capital expenditure and investment. Data out of China have stabilised but weakness out of Europe and Japan indicates that the re-balancing […]
Global economic data is showing signs of improving, with US GDP surprising to the upside, Spain posting impressive growth and Italy coming out of recession. Eurozone unemployment is at the lowest rate since before the Global Financial Crisis as exports have remained surprisingly strong thanks to Chinese stimulus. However there are continued risks for global […]
Read our full Monthly Market Blueprint April 2019 The global economic slowdown persisted, with conditions in the manufacturing sector contracting, especially for exporters. However some improvement in the service sector, and evidence of inventory depletion give hopes for cyclical economic rebound. Meanwhile trade wars, Brexit uncertainty, weaker Europe and growing suspicions of a sharper than […]
Read our full Monthly Market Update March 2019 The global economic slowdown persisted, with conditions in the manufacturing sector further deteriorating, especially for exporters. However some improvement in the service sector and evidence of inventory depletion give hopes for cyclical economic rebound. Risk asset divergence, a theme of the previous quarter, seems to have abated, as […]
Read our full MWM Newsletter January 2019 Recent market falls follow a noticeable change in mood, and in particular how investors choose to interpret various economic data releases. In the past few years markets have chosen to place more weight on measures which appear supportive of economic growth, and have felt comfortable dismissing those which do […]
Read our full Monthly Market Update February 2019 The global economic slowdown despite a persistent pick upin the services sector, as trade conditions deteriorate. Risk asset divergence, a theme of the previous quarter, seems to have abated, as US risk asset underperformance closed part of the gap with Europe and Emerging Markets. Oil prices rebounded somewhat […]
Read our full Monthly Market Update January 2019 December data indicated that the global economy continuesto slow, despite a persistent pick up in the services sector, as trade conditions deteriorate. Risk asset divergence, a theme of the previous quarter, seems to have abated, as US risk asset underperformance closed part of the gap with Europe and […]
Read our full Monthly Market Update December 2018 November data indicated that the global economy continues to slow, despite a pick up in the services sector, as trade conditions deteriorate. Risk asset divergence, a theme of the previous quarter, seems to have abated, as US risk asset underperformance closed part of the gap with Europe and […]
Read our full MWM Newsletter October 2018 The global economy continued to grow in the third quarter of 2018 despite a backdrop of concerns over the continued imposition of trade tariffs primarily by the United States. It is apparent that any optimism a compromise between the US and its trading partners (China in particular) can […]
Read our full Monthly Market Update October 2018 September data continued to indicate global economic and risk asset divergence, consistent with a mature economic cycle, with USD assets rising as a result of Mr. Trump’s policies. The global economy is also diverging, with the US on a faster expansion path, while Europe and EM are […]
Read our full Blueprint Sept 2018 August data continued to indicate global economic and risk asset divergence, consistent with a mature economic cycle, with USD assets rising as a result of Mr. Trump’s policies. The global economy is also diverging, with the US on a faster expansion path, while Europe and EM are slowing down. […]
Read our full Monthly Blueprint July 2018 Month In Review On the face of it, June has not been an exciting month for risk assets. Developed market stocks ended the month roughly in the same place as they started it, while long bond yields were little changed. However, beginning and end figures mask not only […]
Read our full MWM Newsletter July 2018 Global economic growth continued in the second quarter of 2018, albeit in a much less broad based fashion than in Q1. The US economy led the way buoyed by high levels of business and consumer optimism, whilst Europe, and in particular France grew more slowly. Growth in the […]
Read our full Monthly Market Update June 2018 May, a month of European volatility Global stocks were mixed last month. A combination of slower global growth, negative trade news and political volatility in Italy and Spain weighed with investors, many of whom chose to reduce their risk levels from more volatile regions. Performance was greatly affected […]
Read our full Monthly Market Update Following two months of negative returns for risk assets, equities rallied in April as trade war fears were downplayed and positive earnings, especially in the US, continued to come through. The month was also notable in that markets sold off over fears of an escalation of the Syria conflict, […]
Read our full MWM Newsletter April 2018 The first quarter of 2018 saw a return of market volatility and a reversal of gains from the end of 2017. Despite a strong January, global equities finished the quarter down 2.1% in local currency terms, but down 4.7% for UK investors as the Pound continued to strengthen, […]
Read our Monthly Market Update After February ended a run of 11 consecutive months of positive, less volatile returns for equities, March saw risk assets continue to suffer as US bond yields peaked near 3% and fears of a global trade war came closer to fruition, with President Trump placing tariffs on Chinese imports of steel […]
Read our Monthly Market Update February saw the return of volatility for stocks after nearly two years, as a confluence of catalysts affected equity markets: US Bond yields breaking critical levels above 2.55%, a new more hawkish and uncertain Fed, the deterioration of the global trade climate and renewed political uncertainty in Europe and the UK. […]
Read our Monthly Market Update Global equity markets were positive again, registering a 5.3% performance in January, benefiting from the positive sentiment and the passing of the US tax reform at the end of 2017. The macroeconomic environment was less supportive, however, as some key indicators suggested that global economic momentum was slowing down in […]
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