The Song Remains the Same
As we enter Q2 one considers the recent past and peers into the near future. Forward looking markets suggest today’s headlines are already in the price (not to mention available here some months ago : Econ BOOM, US political realignment etc).
I expect more of the same - thus today's title courtesy of Led Zeppelin (from all the way back in 1973 - talk about 50 years!). Markets have pricked asset bubbles, be they in stocks or bonds, & surveying the landscape it's hard to see any super inflated public market pricing. From FANGS to Robinhood bros to clean energy/ARK names to mispriced USTs we have had a rolling series of corrections.The Archegos affair is just the icing on the cake.
The result? ATHs in stocks, VIX under 20 and the worst Q for long duration UST in decades (no surprise here). Impressive. As noted two months ago Higher Rates Are a Good Thing. One of my prime rules is to let the market tell me - not me try to tell the market. The market was speaking loudly in the past week with the Biden America Jobs Plan launch & its $2.5T price tag & a March jobs # way BTE - what did the 10 yr UST do? It rallied - what does that tell us - that it's in the price.
Now we come to the testing time of higher inflation prints - the short period of 4%+ numbers - whether in China or US PPI & coming to US headline CPI - it's here and will be so for the coming few months as the negative numbers from last year’s Covid cessation roll off the y/y comps.
Wouldn't it be perfect for UST to rally - yes, rally into this period - some folks (htip David Hunter) think this is likely, coming together with reopenings & earnings to spur a Nasdaq led melt up in stocks - plausible enough for me to consider when doing my monthly model portfolio review this past week.
This model portfolio review process is always interesting - it's where the rubber meets the road so to speak. A couple of observations to share: first, I looked not only at YTD performance but also performance going back to 12/31/19 to avoid the March to March Covid comparison.
Here is what I found: fully half of the current portfolio is either down or up less than 10% over the past 15 months vs up 20% for ACWI. That suggests some good potential upside.
Second, worried about the UST rally & Nasdaq led melt up scenario, I explored how much the thematic slice of the portfolio - some 20%+, would help in that scenario. A YTD correlation analysis of the two yields a correlation of .68, implying some protection there to go along with the model’s heavy Value tilt both US sector and non US equity OW. (Investing Thematically )
Finally, I would just note the challenge of liking what's in the model and working hard to shoehorn in one or two other ETFs that I wanted to include - a high class problem that took hours to resolve but we got it done. April is Financial Literacy Month - reach out to learn more about our Model Portfolio Delivery service.
The Song Remains the Same - HIgher Rates are a good thing, expect surging EPS - though much is expected here (FactSet reports Q1 as biggest US EPS increase since 02 led by Value sectors). Don't invest on headlines - Europe seems like a disaster with vaccinations fumbles and lockdowns galore but record Manuf PMI and a Composite PMI at 53 says something else as do the equity markets with EuroStoxx 600 up 5 weeks in a row and down only 3 weeks since Dec. Yet the US - EAFE valuation gap remains extreme as noted by AQR Capital.
Peering into the near future, expect US inflation bump to be transitory, US job gains to hit 1m+ per month (still 11M short in US while EU UER at 8% has room to improve) re openings to continue & Biden’s Jobs Plan to pass a la the Rescue Plan (both V popular across the aisle).
The US recovery is baked in - China too - watch Europe. Expect the divergences between EU and US in the vaccine process and economic activity to start to narrow, supporting the Euro & leading to USD rollover & EM FX bounce. Don't freak over China credit concerns - still targeting 11% y/y loan growth.
On the Thematic front, Crypto news continues to pour in - $2T in assets, GBTC to convert to an ETF, Coinbase to list next week. Great to see Jamie Dimon jump on board the fintech train - I am V focused on the melding of banks, fintech & Crypto.
Watch for Carbon to be a big part of the upcoming Climate Summit - it was virtually ignored in the Jobs Plan roll out… expect carbon permit pricing to move sharply higher in coming quarters/years as companies come under pressure to publicize their carbon footprint and seek offsets as a result. The interplay between the Georgia voting law and employee, customer, shareholder pressure for corporate response represents the template.
Bottom line: risk asset risk reward seems appealing, especially given positive seasonals ahead and bubble pricking behind.
Enjoy the attached links: first the recent Global Macro webinar with GATE Advisory and second the inaugural video from Nucleus195 where I cover the TPW Advisory investment process in a quick 18 minutes. If you are new to TPW; and we have had many, many new additions these past few weeks - welcome - this video is perfect for you.