The ‘Happy Place’

The ‘Happy Place’

“It’s almost as if it just can’t get any better than this,” one strategist told Bloomberg Friday, after a week that found stocks and bonds rallying together.

Gold also logged a weekly gain. A widely followed investment grade credit product managed a fourth straight weekly advance despite a Friday slump. Commodities rose ~3%.

You might call it the return of the “everything rally.” We’ve seen these before. What’s particularly notable right now is bonds’ resiliency in the face of scorching US economic data, which, just to recap, included the hottest monthly CPI read since 2012, one of the best retail sales prints in history and a plunge in weekly jobless claims.

The counterintuitive reprieve for bonds follows one of the worst quarters in recent memory, and has manifested in equities via renewed outperformance from secular growth and other perennial winners-turned reflation trade laggards in the post-election, pro-cyclical trade. You know the story. I regaled you all week (linked articles below).

Read more:

The Baffling Bond Rally

Raising Eyebrows

‘The Main Question’ (And A Lot More)

One notable (and easy to grasp) consequence of bonds’ predisposition to rally despite the data is relative strength in the Nasdaq 100, which is on track to outperform value shares by the widest margin since August.

You can conjure any number of other examples. But more broadly, we seem to have entered what one widely-followed strategist described as a “happy place.” The question is how long our stay will last.

“Sell the rumor, buy the fact,” BofA’s Michael Hartnett wrote, of the juxtaposition between the bond rally and the incoming economic data. He called recent reads on the US consumer, the housing market and industry “max boom,” which has been “greeted in April by a rally in Treasurys, follow[ing] the worst Q1 ever” for the long-bond.

For Hartnett, the 1.50% to 1.75% range for 10-year Treasury yields is “a temporary ‘happy space’ for stocks.”

“Temporary” is the key word. It could well be that the return of the “everything rally” proves fleeting — states of bliss are always ephemeral, after all.

Note that Thursday’s session (which I called a “barnburner” for multi-asset investors) sticks out on simple replications of model portfolios. The figure (below) is just an index that measures the performance of a multi-asset risk parity strategy that allocates to stocks, fixed income, and commodities and targets a volatility level of 10%. Thursday is marked by the green dot.

Note also the risk parity meltdown that unfolded during the panic last year. That’s worth mentioning on occasion. Risk parity de-leveraging was a kind of campfire ghost story prior the pandemic. For a few sessions in March of 2020, the kraken was released during what turned into the biggest VaR shock since Lehman.

But let’s not dwell on nightmares. The question now is simply how long markets can exist in bliss, so to speak. “Awesome economic data, inflationary pressures remain contained, and you’re seeing this nice favorable reaction from the stock market,” the same strategist mentioned here at the outset mused.

For BofA’s Hartnett, there’s “only one more ‘V’ to go” after stocks, housing, PMIs, EPS, and GDP all rebounded. Jerome Powell spoke of an “inflection point” for the US this month. A “V” in inflation on the heels of Powell’s “inflection point” will be followed by monetary policy, Hartnett suggested.

Notwithstanding developed market central banks’ laborious efforts to dispel the notion that tightening is coming anytime soon, there have been five rate cuts in 2021 versus a dozen hikes globally, according to BofA. In 2020, there were 195 cuts and just five hikes. Of course, one has to separate emerging market monetary policy from what happens in advanced economies, but the point is duly noted.

In the latest edition of the bank’s popular “Flow Show” series, Hartnett said he’s “stick[ing] with an asset allocation of commodities and volatility over equities and bonds.”


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