Before yesterday’s brief curfuffle, markets remained entirely care-free; climbing walls of worry, shrugging off every and any potential pitfall (from the collapse of American retail to global armaggedon) as new high after new high, on an ever-decreasing base of mega-cap stocks had become ubiquitous. Like many rational investors looking asconce at this ‘market’, former fund manager Richard Breslow wants to know “why are equities bid?” … and he has an answer…
It probably won’t come as a surprise to learn a lot of people are confused about why markets are behaving this way. After all, wasn’t everything a tumble only a week ago? Yet, as I was looking at the screens yesterday before the torrent of bile made traders give up for the day, stocks and emerging market currencies looked like they expected new highs to be imminent. Treasury yields were back in “that range,” the dollar and credit bid.
So how come the markets don’t react as one Congressman after another felt compelled to issue statements that they disapprove of bigotry and so many CEOs resigned from the President’s policy and strategy advisory forums that they had to be disbanded? Why do some scary things get acted upon, others get ignored but no matter what we still seem to be back to the same place in short order?
In trying to answer the question, you can’t make the assumption that every asset class is internalizing the news in lockstep fashion. Even if, ultimately, they may be trying to say similar things. Wall Street looks like it’s sanguine. But that would be a poor interpretation. Investors are just trying to handicap how this all might ultimately unfold and prudence, along with optimism, is creating this endemic low volatility.
Why are equities bid?
No, it’s not based on cheap valuations or some misguided notion that there’s long-term value to be unlocked. Yes, they love the low rates and know the Fed has their backs.
But they’ve managed in an example of salesmanship tour de force to move on from the misguided Trump agenda euphoria meme of late last year to “when he’s gone everything will be well.” And the business friendly aspects of his agenda will be back in play. They can’t avoid the sensible upset caused by aggressive jingoism, to whit last week, but ongoing ineptitude reduces it to a question of timing. They can live with sooner or later as long as they believe they’ll be around to see it.
The dollar is bid, or, more accurately is stabilizing, because it’s already fallen a long way and the numbers just aren’t all that bad. And if we can get beyond shocks, including the debt ceiling embarrassment that freezes the Fed, it remains the base case that U.S. rate hikes will lead the rest of the world, not the other way around. The last thing another central banker wants to do is raise rates and then see a Fed that’s changed its mind.
Bond yields remain under extreme pressure because they aren’t prepared as yet to be complacent about what foreign exchange traders are hoping to fade. That’s what makes both markets so good at what they do. But make no mistake, bond yields are trying their best to show that much below here will require a full-blown crisis. And it won’t have anything to do with economic releases. Besides, staying long fixed income is the best hedge for everything else because long rates will move at a slower pace than other asset prices with higher betas.
Breslow’s parting advice is simple: “Watch gold prices…”
They are trying to make new highs and are overly resilient which, in fact, does mean something. As the oldest of the financial assets it’s learned that a week is a long time in politics. And the mess usually gets worse before we come to a neat or Pence-ive solution.