I am coming into 2024 in a decent position. My MinVar equity portfolio, designed to extract the best from both worlds in the perennial battle between growth and value, has done largely what it is supposed to do. It has offered positive, but below-beta, returns with below-beta volatility, the latter which means that your humble blogging investment analyst has been able to sleep calmly at night. In bonds, I moved my exposure onto the front early in 2023 in line with the yield curve inversion. At this point I see no reason to change that strategy. Why buy negative carry in duration when you don’t have to? There will be a time to take a strong bet on duration, but I can’t really see that point until either the front-end has collapsed under the weight of global central bank easing, or unless the curve rinses everyone by bear-steepening sufficiently to restore a positive roll and carry in the long bond. In other words, I don’t see any reason to buy duration as long as the curve is still deeply inverted.
Read MoreThe most significant change across my favourite market charts in the past few weeks is the fact that the US 60/40 portfolio is now eking out a small positive gain on a six-month basis. Chart 01 shows that my in-house 60/40 index—using the S&P 500 and the US 10y note—is now posting six-month returns to the tune of just over 1%. This reversal from a nadir in six-month returns of almost -20% earlier this year is driven by both stocks and bonds. The S&P 500 is up a bit over 10% since mid-October, and ten-year yields are off their highs. This, in turn, invites the question of whether we’re seeing the beginning of a reversal in the decline in stocks, and rise in yields, which have haunted investors this year. I wish I knew. To get at an answer to the question, however, it’s best to separate the equity story from the bond market story, at least to begin with.
Read MoreI’ll let the charts do the talking this week. This is always a good idea when it’s been a while since you’ve had a broader look at markets. As far as I can see, not much has changed. The U.S. CPI report is still the most important economic report of the month. The violent sell-off in response to what was a small upside surprise to U.S. core inflation in August is all you need to know. Markets would like to see a sustained roll-over in inflation, and an associated pivot in Fed tightening. So far, this is not happening. Equities have suffered badly in the wake of the August CPI data, and a 75bp rate hike from the Fed later this month is now a done deal. Some sell-siders have even stuck their neck out, calling for a 100bp hike. It’s gnarly.
Read MoreI am short on time this weekend, so I am doubling down on the story I told last week, with two more charts and some additional comments. The first chart updates picture of the startling spread between price change in S&P 500 and its multiple. As of last week, the U.S. large cap equity index was down 0.2% on the year, but trailing earnings were rising just under 22%. The only way to square these two headlines is to note that the P/E multiple has crashed, from a high of nearly 23 in January to 18 today. The silver lining is easy to spot. The market is now about 20% cheaper than it was at the start of the year, a significant re-rating.
The flip side is that paying 18 times earnings for the S&P 500 is not egregiously cheap. If growth in earnings roll over, a further decline in multiples would, at best, lead to stagnation; at worst, it would drive prices much lower. That’s certainly a significant risk if you consider that this year’s impressive jump in earnings, at least in part, have been driven by tax cuts, which won’t be repeated next year. It gets even worse if we start to change the assumptions around share buybacks, another important support for earnings growth via its denominator-reducing effect on the share count in the EPS calculation.
Read More