The way markets operate this year, treating high quality US assets as a haven, makes sense. But even a smart move can go to extremes and create distortions.
The trick is to try to understand when rational actions lead to conditions in a risky environment. It is not yet clear where we are.
That’s right – even though the coronavirus epidemic has raised expectations for trade and manufacturing-led economic acceleration earlier this year, the fact that the S&P 500 is at record highs and the way it got there is not illogical. At least not quite.
Government bond yields plunged into the lowlands last summer, investor money rushed into bond funds, credit markets remain generous, the US economy offers more robust growth, and US securities promise more secure cash flows and yields.
In response to the tremendous uncertainty of China’s economic performance, the United States outnumbered the rest of the world, and within the US market, world growth and defense stocks fueled profits and appreciation.
The annual performance of the S&P 500 sectors is shaping up just as one might expect given this dynamic. Top: utilities, technology, real estate and consumer discretionary. The lagging indicators are energy, financials (thanks to these low yields) and industrials.
More thematically, the largest companies, considered the most reliable for future growth and profitability, are attracting more than their share of global capital.
When investors buy bonds as aggressively as they do now – as Bank of America said last week it set a record for fixed-income inflows – that means they are down to “duration” or long-term cash flows. Equity-sized stocks are also, in a sense, fixed assets existing somewhere adjacent to corporate bonds on the asset spectrum.
So, we see the life of the Vanguard Mega-Cap Growth ETF versus Global Dow. The latter is a list of multinationals that has stopped while Nasdaq’s glittering reserves carry MGK skyward.
The main idea: Respect the message in the markets, but also respect the tendency of the markets to become self-confident. Good advice. It would be easy to know when one of the two extreme extremes was reached ..
Trader Aleksandar Kumanov