Global equities were on track for their best week of 2024 and it was no secret why: The dovish pivot across developed market central banks is manifesting.
Sure, the BoJ raised rates for the first time in some folks’ professional careers, but that doesn’t count. Japan’s a story all its own. And besides, it’s not exactly as if BoJ policy’s restrictive, or headed there.
Between the SNB cut, a “throw the damn towel” moment for the hawkish dissents in the BoE vote split and an unchanged median 2024 Fed dot, the writing’s on the wall.
“[The] Fed’s desperate to cut rates, the ECB and BoE need to cut rates, the SNB is cutting rates [and] the PBoC’s also cutting rates,” BofA’s Michael Hartnett wrote, in the latest installment of his popular weekly “Flow Show” series.
The figure above, from Hartnett, depicts a demonstrable global tilt back towards easing. That’s “the DNA of today’s ‘everything bull,'” he said.
People who hate money were irritable with Jerome Powell this week. The Fed Chair, critics insisted, should’ve taken a few pot shots at the equity rally during his press conference. I’m just joking about the “people who hate money” bit, but it’s important, I think, to remember that everyone’s generally long assets. Including pundits and “bearish” Wall Street strategists.
So, no. Nobody was actually angry at Powell this week. Not really. They were just angry on paper and on television. Nobody’s disappointed that the value of their retirement accounts is up.
Speaking of up, that’s been the direction of travel since October. Up, up and up some more.
This was the 18th weekly gain in 21 weeks. If your job’s managing other people’s money and you’re not participating in this somehow, that’s probably not going to be your job for very much longer.
“As the major central banks (except the BoJ, of course) have laid the groundwork for rate cuts during the second quarter, it follows intuitively that risk assets have continued to perform well in the current environment,” BMO’s Ian Lyngen and Vail Hartman wrote Friday.
In an FT interview, Andrew Bailey suggested the UK hasn’t seen a wage-price spiral and indicated that in his view, it’s rational for markets to expect rate cuts this year. “The global shocks are unwinding and we are not seeing a lot of sticky persistence [in inflation] coming through,” he said. “The fact that we have a curve that has cuts in it for the year as a whole is not unreasonable to me.”
Again: The writing’s on the wall. That doesn’t mean risk assets can’t correct. It just means that policy restriction will be dialed back in the months ahead. The question is whether that’s already in the price.
“Clearly, equity investors don’t need hard evidence that a cut is imminent as much as they needed to know that the next leg in the cycle will be toward lower policy rates, not higher or steady,” Lyngen remarked.
You captured well the job risk mentality. Twenty-one weeks is less than the 6mo probationary period for new hires across many industries. Yet even seasoned vets carry the anxiety you allude to as an integral part of their decision-making process. Twenty-one weeks. Not exactly a long-term investment horizon.
Is it the Fed’s responsibility to speak publicly about structural and valuation risks in markets? Over the past couple decades, the Fed acted as if their mandate includes the responsibility to help educate investors, particularly the lay public, about risks, particularly overlook and poorly understood risks. They do so by speaking about markets directly and indirectly.
Powell sprinted past a question on Wed about easy financial conditions. Today he speaks again, so we may learn if that was intentional, but so far the reasonable inference is he intended to avoid any discussion of financial conditions. Most of the nonprofessional investment community hasn’t the foggiest idea about why a reasonable person would ask Powell how the Fed’s view of financial conditions measures in relation to inflation, asset prices, rates, etc., has changed over the past 12 months. I’m sure someone can write a quick paper explaining how Powell could square the circle; evidently, based on former Fed officials’ and others’ comments, Powell needs the explanatory assistance. The moral and legal issue is why doesn’t Powell do it? And why doesn’t he go a step farther and try to educate the public about why it matters and how it affects basic–and historical–notions of risk? The answer emerges analytically and intuitively when one looks at the totality of Powel’s service as Chair and all the comments he’s made along the way. I’m not suggesting he’s a bad guy; I think he’s a good-hearted guy. But, speaking in general terms, the psychological aspects of the twenty-one week, job security phenomenon affect Powell as well and suggest, no matter how good a guy he is, he’s not honoring consistently or thoroughly the responsibilities of his public position.
His responsibility, at least as far as the Press goes, is to keep the economy going in the right direction. So far, he’s doing a good job in that we haven’t had a recession or increased inflation. Since nobody knows how the ‘system’ works, I guess he’s been lucky. Can we really complain then?
I think the Fed is more focused, and rightly so, on “actions” (attempting to corral inflation and then attempting to make housing affordable for the masses) than “speaking/educating” the masses (a daunting task). If the stock markets flourish as a result- so be it. As H points out, even union/governmental pensions will benefit from a rising SPY.
As far as who is angry- at this point it is those who didn’t get back in the market last October. They are mostly angry with themselves.
I experienced such “anger” from February, 2020- when I went completely to cash (I thought that was a good decision based on covid) and then watched the market rocket ship back up, as fiscal/monetary policies flooded the USA with money- until August, 2020- when I finally caved and got back into the US stock market because I finally accepted that potential fiscal/monetary largess was much, much bigger than I had considered (thanks in large part to reading The Heisenberg Report).
What I learned is this- we are not in a free market capitalist economy. Our economy is significantly controlled/influenced by the government- who wants people to have rising economic stability. Therefore, fiscal/monetary activity will always attempt to achieve that goal- even if the gulf between the very rich and the poorest increases. The primary goal is to raise the living standards at the bottom of the spectrum; not to bring down the rich.
We have never really had a free-market economy, starting in the 1890s with anti-trust legislation and the even greater invention of Federal income tax, the tool kit through which we manage our economy. The reason we can’t get a simplified tax system is mainly because we need to keep all the tools that allow the government to allocate and distribute value to control our system. For example, CRE is managed through depreciation, deductions for taxes and interest, etc. Oil exploration and production is managed through government leasing programs, depletion deductions, the management of limited partnership income, etc. The income tax system is far more than a revenue gathering mechanism, it is a complete, politically managed system for the distribution of the spoils of our economy. Since the first deduction was allowed and the first loophole created, it was never anything else.
How else do you distribute the spoils of production to hundreds of millions. It’s not easy, or we’d have a better/fairer system. Hopefully that system is up ahead somewhere.
In Mar 2020 I bought airlines, cruise lines, restaurants, hotels, movie theaters, foodservice companies, and other stuff that was collapsing from Covid. Criteria was that if they laid off everyone and cut every cost they reasonably could, would cash last one year. Also bought vaccine stocks. So I had stuff to cheer that year, BUT I failed to buy stay-at-home names like ZM, AAPL, HD, etc, so I had plenty to be angry about too. And I held cash and hedges for too long, more anger. In 3Q21 I cut exposure way down and got very defensive, there was a period of anger and then three quarters of, not pleasure, but relief. In 4Q22 anger returned, and stayed until I got with the program a couple quarters later and then the market broadened out to meet me where I was. Right now there is no anger, all pleasure, and a worrisomely rising degree of comfort – I mean looking at how comfortable investors seem to feel, I’m worried. Oddly, part of me feels better when I’m worried; when I’m not worried, I feel like I’m missing something. Right now it’s a sort of generalized worry; when it crystallizes into specifics, I’ll feel better yet. Obviously, this mentality calls for therapy, but we live in an abnormal environment so there’s only so much one can do to be normal.
Does worry help or hurt your investing?
It helps. I worry, so I look harder at what I own and look harder for other things to own. Then when things change, I (hopefully) have ideas teed up.
If misery loves company, here’s some love. As an even newer investor back then, I sold everything the day before the bottom in March 2020, wary of the upcoming unemployment figures that actually marked the very bottom, and watched incredulously as it rocketed back, sitting out most of the rise, certain it would fall again. Lesson learned. I suppose we’ve all got to do that once.
The funny thing is I sent a panicky text to a few family members who I knew were in the market, not realizing one of them had gotten a new number, and so the text went to a total stranger at his old number. So I got back a reply, “I just got this phone, please remove my number from your address book. And don’t freaking sell, it always recovers.”
Exactly, the Fed has no responsibility for inflating the stock price balloon. Its mandate is to keep inflation under control and support employment. Housing and the stock market are what they are, both too high.
It seems to me that the ‘inflation employment’ mandate is often just cover if the economy falters.