Note Precis Dec 11, 2020 – Narrow Path to Hew

Note Précis Dec. 11,2020 –  Narrow Path To Hew: There appears a narrow path to hew whether considering politics, economics and capital markets valuation. Meanwhile, momentum and central bank largesse driven complacency in markets risks enhancing volatility.

On politics and trade, long dated frictions appear from resources to aircraft to info. tech. to services. Tariffs and trade have long    motivated successive U.S. administrations of either party. The full spectrum of U.S. policy is likely to be unveiled over months and not weeks. Elsewhere, long term fissures in Europe are exposed from the west in Brexit talks and within the east in vehemence in Poland and Hungary. German populace patience may be stressed on being taken for granted. In Asia as exposed on social political and economic matters, China appears prepared to risk prolonged blowback, likely from near and far. The Levant endures an explosive cauldron. Seemingly latent, political stress is likely.

Irrespective of Covid-19 vaccination schedules, economic recovery is likely to be globally gradual. Arithmetically, global economies would be weaker than before even if 4 ½% GDP recovery in 2021 were to follow contraction in 2020 of 4 ½%. Unlike pre-2000 mainly U.S. consumer centric cycles,  the current mix realities reside in three power blocs of Asia, Europe and the United States. Also, many prior cycles have had as stimulant, massive early consumer aspiration. Currently, we expect the early stimulant to recovery to be smaller and likely to require broad based infrastructure and physical investment activity.

Of interest in capital markets are currency signals; yield compression in fixed income; and valuation sustainability in equities –  all relative to achievable long term growth. The U.S. dollar has had significant recent weakening amid fixed income yield bifurcation. Such fissures in 1987 were precursor to stress. U.S. corporate yields have compressed versus longer term Treasuries which in turn appear to be moving in different swirls than German bund yields. Meanwhile, European government yields spreads seem compressing. The narrowing Netherlands versus Germany spreads may signal stress.

Long cycles tend to dull institutional memory. Portfolio diversification remains in order. By espousing short duration during potential currency market volatility, we underweight fixed income with overweight in precious metals.

Notwithstanding monetary ease, internal sector momentum mix and valuation versus sustained earnings deliverability are likely to be equity issues. By contrast, momentum activity and even theoreticians has appeared driven by equity premiums versus ambient bond yields. The momentum cycle has been low quality and social media centric. Our focus is on sector rotation evolving and on best of class quality. For an infrastructure and physical investment driven period, we favor industrials, financials, resources, structural information technology and healthcare over the social media and consumer areas.

Seasons Greetings and be Safe.