The Days Ahead:
Bond repositioning week. Europe very solid.
The dreaded drum solo. Those old enough will remember the 20-minute interlude that felt like hours in ‘70s and ‘80s rock concerts. There wasn't much to do except wait it out. Markets feel like that. U.S. bonds and equities have done very little in the last month. The S&P 500 peaked in early March and the 10-Year Treasury has bounced between 2.3% to 2.6% since December. Stocks are staying put until something more definite happens (tax cuts, demand, inflation) while bonds find it hard to believe the “get-ready” Fed talk…and last week saw a number of Fed Governors walk back their more hawkish positions.
Remember the New Year predictions? All those ‘fraidy cat bonds “bad” and stocks “over-done” reports. Well, the stock hype now faces some real challenges and recently we saw something we would not have expected…bonds outperforming equities.
Yes, it’s a short time frame and probably just come quarter-end window dressing from pension funds loading up on bonds after the stock rally. Anyway, to us it means stock earnings have some catching up to do and until then we prefer Emerging and International markets. As for bonds, we would note that Fed Funds futures into January 2018 have barely moved since the March 15th hike, which means the market doesn't see much change in outlook.
And volatility? No one took us up on the beer challenge but we’d leave it that risk appetite is quite high with BAA and High Yield spreads at multi-year lows. Vix is a lagging indicator and probably won't turn until the credit cycle turns (h/t Cameron Crise).
1. Emerging Markets again: Yes. It’s still the best performing major asset class this year, up 12% and big moves in India and China. We wrote a few weeks ago why we like Emerging Markets but we would add this chart...we’ll talk you through it.
It's the middle and lower part we like. It shows that Emerging Markets PEs are below their 2015 peak while the U.S. is at the very top of its range. And the bottom chart shows the ratio of U.S. and Emerging Markets’ PEs with Emerging Markets at a near 20% discount to the S&P 500. It also seems sensible to buy into a market with a seven-year flat line than one bouncing around all-time highs.
2. Ho-Hum on the Economic Front: GDP was revised up a bit, but the Atlanta Fed GDP Now can't seem to break 1%. Consumer confidence was up but it’s easy to say “Yes, I feel confident” if your stock portfolio is up but not so easy if your wages barely moved. Consumers have yet to step on the gas for increased spending.
Yes, those last two blue bars are the first back-to-back declines since 2011. It’s another example of “soft” data (so confidence, intentions, expectations) pulling ahead of “hard” data (so production, sales, investment). That gap can close two ways (one of which would be ugly), and until there’s more direction on which, we may not see much action in equities.
Bottom Line: Fundamentals usually trumps technicals but the market is up on high expectations and isn’t ready to give up on the optimism trade. So technicals may have their day. We have a duration extension in the Barclays Agg index this week, which may throw up some trading anomalies. Meanwhile, enjoy Ian Paice on the drums.
FBI Director’s anonymous Twitter account hacked in 4 hours
De-stressing the Army sniper way
--Christian Thwaites, Brouwer & Janachowski, LLC
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All charts from Factset unless otherwise noted.