Note Précis September 4, 2020: Market Momentum Meets Messaging Mash – Even as capital markets appeared comforted by momentum, there had appeared messaging mash, including in market internals, in central bank assessments and in politics. Over-rationalization of hidden value has a long history, in equity markets especially about groups du jour. In fixed income in June 2017, there was penchant for 100 year maturity bonds including for countries with a checkered financial history like Argentina, only three years later now mired. Globally and as benchmarked by the S&P 500, earnings equity valuation is high. Even if earnings have bottomed amid battered economies, we see earnings recovery as being in a three year and fractured path to prior peaks. Momentum has its risks and even with monetary largesse, rebalance is overdue.
At Jackson Hole, Wyoming in August 2020 and perhaps to finesse into the last pre-election FOMC meeting on September 14/15 2020, much was made about inflation targeting. It moved from a single point of 2% to a range around it with balance for growth. The Federal Reserve risks mixed messaging. It had no inflation target until just a few years ago. In the abrasive runup to U.S. general elections of November 3, opinions may sharpen around Labor Day. Other political tensions stretch from the Baltic to the Mediterranean to the Indo-Pacific to trade.
Markets seem enamored about central banks being both able and willing to cushion risk. Being obfuscated are rebalance of risk premium compression in fixed income and of valuation versus momentum in equities. In the movements of gold, the Swiss Franc, the Renminbi and many G-7 currencies versus the U.S. dollar and notwithstanding relative liquidity, we see a significant ratcheting of tension. We espouse short duration in fixed income and precious metals like gold bullion instruments in asset mix.
In Q3/2020, we see equity opportunities to rebalance. In growth, strong balance sheet Healthcare at overweightandInformation Technology now market weight seem better positioned than Consumer Staples and concept social media that have led momentum. In cyclicals, we favor Industrials over Consumer Discretionary dependent on aspirational spending built on leverage. Strong balance sheet Energy offers opportunity of a severely out-of-favor kind. Financials performance is crucial for market direction and we favor banks where less excess may reside. StrategeInvest’s independent consultancy operates as Subodh Kumar & Associates. The views represented are those of the analyst at the date noted. They do not represent investment advice for which the reader should consult their investment and/or tax advisers. Any hyperlinks are for information only and not represented as accurate