Friday, 1st of June 2018
Yesterday we watched the month of May close with a whimper; the DJIA lost some 250 points, the S&P about 0.70% and the NASDQ some 0.3%. A strange Presidential week not to say month… The meeting of leaders of the US and North Korea was scheduled for June 12, then cancelled and now there are noises of renewed possibility of the meeting happening anyway, and then we have support for the idea with frenetic jetting around by Pompeo and some North Korean ex-spy-masters… What drama. Keeps us all nervous. The real political tremor was far away from DC this time, away from Pompeo and closer to Pompey in Italy; Election results hint at a risk of Italy copying the UK and going “Quitaly”. Italian bonds got whacked…And if all this didn’t suffice, Rajoy was ousted in Spain and the Trumpiness of the US reawakened- Tariff again, on the EU and NAFTA partners. All these shouts and hollers of historic economic injustice bring back memories of the children’ stories of the little boy who cried Wolf…
With all this going on in May, one would think that the old adage of “Sell in May and Go Away” must have been valuable advice this year, but alas, not so- The DJIA started the month at 24’160 and closed yesterday at 24’415, the S&P rose from 2’648 to 2’705 and the famous “Fear Index”, namely the VIX closed the month at 14.69 down about one point in the period. The Dollar Index the DXY rose from 91.50 to 95 during the month, to trade now at 94.
Investors piled into safe-haven bets on Tuesday as political turmoil in Italy sparked fears of another euro crisis, driving up the Japanese yen and pushing the U.S. dollar to a 10-month high against the euro. A deepening political crisis in Italy, the euro zone’s third-biggest economy, provoked selling of Italian assets and the euro that was reminiscent of the euro zone debt crisis of 2010-2012. The dollar rose on Tuesday to its highest against the euro since July 2017 at 1.1506, after a sell-off in Italy’s debt market drove investors to dump the single currency.
Bill Gross had his worst day in almost four years yesterday. The steep decline in interest rates triggered by fears that Italy might leave the euro sent Gross’s $2.1 billion Janus Henderson Global Unconstrained Bond Fund down about 3% Tuesday, making a bad year even worse. Other prominent funds recorded their biggest one-day gain since 2009. Remember that little inscription at the bottom of all prospectuses of funds “Past performance is no etc., etc,”? Well, last week’s “Disaster of the Week”, the Turkish Lira has come back somewhat, stabilizing at about 4.60 to the USD.
Strange, this calmness in the statistics of the markets. The big issues are huge and inflating around us…
Maybe the “truth” lies elsewhere- The current outlook for growth is bright, but specific risks could endanger long-awaited progress, according to a report released Wednesday by the Organization for Economic Cooperation and Development (OECD). Global gross domestic product (GDP) growth is nearing the long-term average of 4%, the “cruising speed” reached before the financial crisis. Unemployment across the body’s 35-member states, most of which are considered highly developed, is at its lowest since 1980. Economic expansion is still being fuelled by low interest rates and fiscal stimulus, meaning that it isn’t entirely organic and is more vulnerable to market and political changes, warned OECD Secretary-General Jose Angel Gurria. “The economic expansion is set to continue for the coming two years, and the short-term growth outlook is more favourable than it has been for many years,” he told the press during the OECD’s annual forum in Paris. “However, the current recovery is still being supported by very accommodative monetary policy, and increasingly by fiscal easing. This suggests that strong, self-sustaining growth has not yet been attained.” Oil prices have risen significantly in the past year, and if they continue along this trend — some experts forecast a return to $100 a barrel — economies will see serious inflationary pressures and lower household growth, the report said. And as central banks move away from monetary easing and raise interest rates, particularly in the U.S., this normalization could expose the economic vulnerabilities created by years of financial risk-taking and mounting debt. Public and private debt are at record highs, and for emerging markets with heavy leverage in foreign currency, the economic pain is already manifesting itself.
None of the narratives floating around the market make any sense. Bond yields are too high, and too low. Politics don’t matter, then they do. There’s excessive inflation, or not enough. But one message the market keeps sending: don’t get comfortable, because around the corner is pain. Stock traders have been chained to their screens in a year when the average down day is 24% bigger than the average up one, the biggest gap since 1948. It played out again Tuesday as investors were treated to a session of price swings that would have ranked with the worst of the preceding two years — but in 2018 doesn’t crack the top 20. Phrased differently: the biggest decline in the S&P 500 last year, a 1.8% drop on May 17, would rank as the eighth largest since January. And it’s only through May. Only one thing has been constant in 2018, that every few weeks, equities get hammered. U.S. companies are in the midst of one of the biggest earnings expansions ever, everything from buybacks to capital spending is surging and forward valuations are cheap. But it’s proving little barrier to intermittent wipe-outs. Ten-year yields dropped by the most since at least November 2016 to 2.78%. Half a month ago, when yields were at 3.1%, such a decline would probably have sparked an equity rally. Not Tuesday… Like Andrew Lang, we use statistics like a drunk uses a lamp post; for support, not illumination…
Here, with yields down some and earnings rising further (only one month to go before Q2 season is on!), with the VIX low, oil in a new band of $65-$70 and still no inflation, we use these data to support our long-standing long-equities views.
We leave you with the words of another near-genius near-US President – Dan Quale who said “The future will be better tomorrow.”
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