Most risk assets have been having a good year, in anticipation of rate cuts and monetary inflation. Don’t laugh. A fund manager told me that his team are so far behind their benchmarks and under tremendous stress since late October last year that only a total meltdown would offer a relief.
He has remained in the bear camp, expressing concerns over a variety of issues, including geopolitics, macroeconomic factors, and stretched market positioning. I shared with him the potential benefits of meditation in calming his inner mind.
The global party is a little too hot at the moment with the dollar’s on the back foot. Everything is at record highs. Stocks, gold, cocoa, crypto, Taylor Swift’s concert ticket prices in the “black market”, you name it. Credit spreads are at post-COVID tights and volatility’s suppressed. Not long ago, Japanese equities scaled a new record for the first time since 1989.
Rate cuts are coming! Across two days of Congressional testimony, Fed Chair Powell commented that the central bank is “not far” from having enough data to ease policy this year. Across the pond, the ECB laid the groundwork for a June cut.
Phew! The latest jobs report was a superb one for the soft landing narrative. The US economy added more jobs than expected in February, while revisions trimmed the prior two months’ headlines by 167,000. The jobless rate rose and wage growth cooled sharply. This report will give Jerome Powell a deserved bit of relief. It allows him to stick to his interest rates policy.
The prices of many speculative positions that I track closely simply don’t make any sense. Well, they have gone up a lot with bears driven to the brink of extinction. Too much greed is never a good thing. It reminds me of the famous Warren Buffett quote: “Be fearful when others are greedy, and greedy when others are fearful.”
When the stock market enjoys a strong bull run, the bubble warnings always come out of the woodwork. Skeptics and those inclined toward crash predictions have spent lots of time documenting parallels between today’s US stock market and two previous bubbles: the dot-com boom and the speculative frenzy of 2021.
How dull and uninteresting. Bubbles are in the eyes of the beholder and it is easy to find disagreement among experts. Valuations are not as attractive as they were one year ago but the market can stay expensive until valuations become a serious headwind. Of course, that doesn’t mean we don’t live in a volatile world.
A “crash” is coming! A pullback or consolidation is on the horizon. Although it is a positive development, it may still unsettle some of my more emotionally invested clients. That is the bad news. The good news is if that is you with a longer investment horizon, a pullback shouldn’t keep you up at night. Our other assets with low correlation to stocks and bonds will do well.