It’s been a while since I looked at markets, as I am busily trying to finish the second chapter of my new demographics project—see here—but peering across my portfolio, I haven’t missed much. Granted, the straight-line rise in green and clean energy stocks—a theme that I am invested in—has petered out, but otherwise, most of what I own keep going up, and the number at the bottom of the column keeps getting bigger. Investing in a pandemic-stricken world, it seems, isn’t too bad. When I haven’t looked at markets for a while, I tend to go back to the basics. The first chart below plots the six-month stock-to-bond return ratio in the US, which has been locked at +20% since the beginning of the fourth quarter. This is punchy, even unprecedented, but I am loath to second guess this trend at the moment. Sustained positive stock-to-bond returns tend to be associated with resilient bull markets, and let’s be honest; that’s what we have, for now. I worry, as I suspect does everyone else, that investors have bought too aggressively into the rumor of a post-virus recovery, implying that they will sell the fact. If that’s true, conditions will become more difficult over the summer, and in the second half of the year, though I am inclined to believe that any swoon will a familiar case of BTFD™.
Read MoreMarket observers and participants have been temporarily distracted in the past week by the battle between Reddit’s plucky retail investors and lazy short-selling hedge funds over the fate of Game Stop. It won’t be the last time the world stops to watch such an event in the same way that people, who would otherwise never watch a race, are glued to the screen when F1 drivers crash into the barrier or each other. Pundits have tried to turn this into more than it is, but until people turn up with actual pitchforks in front of Mr. Griffin’s $60M penthouse pad in Chicago, I am inclined to side with George Pearkes’ take on the matter; move on, nothing (much) to see . People with time on their hands, and a stimulus cheque(?), have decided to take a punt. On the face of it, they have been successful, but most will have bought and sold too late to avoid the gut-wrenching losses that are all but inevitable in the context of the kind of volatility, which Game Stop has exhibited recently. Meanwhile in the boring and dusty world of global macro trading, investors’ eyes are still focused on the long bond in the U.S., where it is, or isn’t, going, and what this means for other asset classes, the economy, not to mention the Fed’s reaction function? Friday’s NFP report was, as ever, a case in point.
Read MoreLast week I warned of a tipping point in financial markets but also contrasted it with potential for a return of the reflation trade. Judging by the price action since, investors have opted to step back from the brink. The dollar finally has found some support—aided by PBoC intervention—bond yields have increased and stocks have rebounded modestly. One week does not make a trend, but the path toward a new reflation trade is simple. The dip in U.S. core inflation is temporary and political uncertainty will fade, prompting investors to focus on the bright side. If so, late-comers to the trend of a weaker dollar and lower yields are in for a rude awakening. By Q1, markets could be looking at a White House pushing through tax cuts; hurricane rebuilding will be underway—perhaps boosted by bipartisan support for infrastructure spending—inflation is rising, and the Fed has re-started its hiking cycle. I am not sure that I believe in this version of the world, but the implications are clear if you do. Bonds should be sold aggressively, the dollar is a buy—in particular against the euro and the yen—and domestic U.S. growth stocks, mainly financials, should be added to global equity portfolios.
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