Note Précis August 9,2019: Amid Volatility, Does the Bell Toll – At present, sovereign bond yields are low and in several cases negative. Daily stock market swings have turned intense, including sharp intraday losses converting into gains and then reversals the next day. Somewhat absent before in this cycle, currency issues loom currently between major economic zones. Political, central bank and market internal streams seem in gust. Amid volatility, it is worthy to ask whether the bell does toll.
Political dynamics seem unsettled in U.S./ China and British/EU relationships, with miscalculations apparent about the other side succumbing. After decades of foreign domination and now ahead of its 70th anniversary of power in October, China seems unlikely to be seen as bending to foreign pressure. Other stresses appear in Southeast Asia and from South Asia to North Africa.
Recent worldwide series of ease likely have a political dimension. The central banks could not afford to be seen as standing pat, irrespective of efficacy in comparison to 2008/9. Still, from capitalist to managed economies, state intervention into capital markets builds inefficiency. Amid negative levels for some sovereign issues, declines in bond yields need to be seen from safety/momentum rather than fundamental hues. Unlike prior decades, the arithmetic of compounding means that now, little margin appears for error.
Along with more sedate overall economic forecasts, companies point to severe competition for revenue growth and appear circumspect on capital spending. Share buybacks seem more contained, quantitative ease notwithstanding. Consensus has apparently favored consumer staples companies for yield and safety as proxy fixed income but some results demonstrate severe business pressures. With three quarters of companies seemingly routinely beating consensus, this metric may have limited value even as consensus appears reducing estimates for 2019 and 2020. Earlier, momentum could gain relief even from beating chronically lowered consensus.
Currently at potentially lower single digit or less in earnings growth for the S&P 500, even the quest for quality is likely to be more discriminating. Sectorally, in Financials we favor those earliest and most thorough in restructuring; in Information Technology, software and hardware over concept; as well as Healthcare and Energy over Consumer Staples and Utilities. Now in this cycle, increased currency volatility has entered into the politics and capital market lexicon. Not just the Renminbi but also European currency levels need watching, less so the Yen. For equity and asset mix, we espouse an overweight in precious metals and cash. 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.