One great quarter down, only three to go to wash away the horror show of 2018. The portfolio did well, though it is still bogged down by a number of single names which are beginning to look a lot like value traps, of the nastiest kind. I am, as ever, optimistic about redemption in coming quarters, but I fear that the retired Macro Man, a.k.a. Bloomberg strategist Cameron Crise, is right when he says that; “the sobering reality for asset allocators is that the returns of balanced portfolios are going to struggle mightily to approach anything like 1Q performance.” It won’t be as easy for punters from here on in, but they’ll do their best. Bond markets have taken centre stage in recent weeks, aided and abetted by significant dovish shifts in the communication by both ECB and the Fed. The result has been a heart-warming rally in both front-end and long-end fixed income, or a pain trade if you’ve been short, and the U.S. yield curve showing further signs of inversion. The 2s5s went a while a ago and now the 3m/10s is gone too, which, apparently, is a big thing. As per usual, economists and strategists are squabbling on the significance of this price action, and I doubt that I’ll be able to settle anything here, so I will stick with the grand narratives, which are tricky enough.
Read MoreEquities have wobbled a bit at the start of the month, but unless they lose the plot in coming weeks, it is fair to say that Q1 will be everything that Q4 wasn’t; decent and calm. Indeed, the finer details reveal an even more striking dichotomy with the calamity that culminated in the rout at the end of last year. Between June—when the PE multiple peaked at just under 21—and the low for the S&P 500 in the final weak of December, EPS rose by 13%, but the index fell by 10%. In other words, the multiple crashed, a story which was repeated across almost all key DM and EM indices. By contrast, the story so far in Q1 is the exact opposite. By my calculation, trailing EPS for the S&P 500 and MSCI World are down 0.5% and 2.1% year-to-date, respectively, but both indices have rallied smartly. This can only mean one thing; multiples have expanded, and they have indeed, by about 14% in both cases since the end of December. I am confident that the tug-of-war between multiple expansion and deteriorating earnings will determine the fate of many equity investors in 2019.
Read MoreLet’s spare a few moments of symphathy for the equity bears. The Q4 rout was supposed to have been an appetizer for a more sustained bear market, and by most accounts, the major narratives are still on their side. Excess liquidity indicators—chiefly real M1—and other leading macro-indicators look dire, and the hard data have predictably rolled over. They gave up the ghost in Europe a long time ago, and are now softening in the U.S. Even better for the bears, earnings growth is now slipping and sliding, a logical consequence of the sharp drop in the rate of growth in almost all main hard macroeconomic indicators and surveys.
Despite such a perfect set-up from the macro data, the equity market has rallied strongly at the start of the year, and is showing few signs of rolling over mid-way through February. There is still hope for the bears. If you are just looking at the headline data, it is relatively easy to dismiss the rebound at the start of the year as a reflexive rebound from the horror show in the latter part of 2018, a bear market rally to suck in the naive bulls before the next deluge. The idea of a bear market rally is still alive, but equity bears also now have to contend with a revival of their greatest foe to date; the global central bank put.
Read MoreMy main job on these pages is to distil the market Narrative™ for my readers, and recent events have made this week’s missive a layup. The debate on whether to fire, and how to arm, the fiscal bazooka has continued, and now monetary policymakers have joined the party. For a while, it seemed as if the world’s biggest central banks were sleepwalking into coordinated tightening, or in the case of the PBoC, failing altogether in the attempt to counter a sustained cyclical slowdown. To the extent that the Q4 chaos in equities was investors’ vote on this strategy, they should consider their message received. In Japan, signs of wage growth briefly alerted markets to the prospect that the JGB market would be un-frozen by further loosening of the yield-curve-control. But the truth is that Kuroda-san is stuck. With global headline inflation pressures now easing, manufacturing and exports struggling, and the looming consumption tax, the BOJ isn’t going anywhere fast; zero rates and (modest) balance sheet expansion will continue as far as the eye can see. In Frankfurt, the ECB recently downgraded its assessment of the economy—the convoluted shift from “broadly balanced” to “downside” risks—and expectations are building that the TLTROs will be extended, or even renewed and expanded.
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