Note Précis June 27,2018: Neither Spiraling Nor Soaring Markets – As the first half of 2018 draws to a close, prevailing events mean neither spiraling nor soaring markets are likely. A readjustment of risk premiums is needed in the current cycle, divergent from the complacency prior to 2018. Daily and intraday swings of 2% in equity markets are indicative of an efficiency deficit compared to theory, not just in tiny markets but also in the heavily weighted United States, Japan and Europe. In the cycles that we have followed, bouts of illiquidity coexist with liquidity whether individually like in silver or aluminum in commodities or junk bonds in fixed income or individual and cohorts of equities. Amid evolving quantitative ease, such bout swings are likely in this cycle as well. To name some businesses under pressure worldwide, restructuring continues from banking to industrial products to information technology. On government policy, twilight zone fawning over adversaries and poking at weaknesses in allies appears on military matters and even on trade as backbone of growth. In the capital markets, there appears an imbalance. It lies between quantitative drives via algorithmics in markets and quantitative ease by central banks versus qualitative pressures in political economy that affect business fundamentals. These events cast doubt on the robustness of valuation expansion in equities and for that matter, in fixed income yields. Anticipating higher volatility and lower predictability than appears generally expected, we stress a focus on quality of operations and of financial structure.
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. E.o.e.