Fast and/or Furious?

If you’d like to receive our market commentary by email every month, please click here.

“If you wish to see the truth, then hold no opinions for, or against, anything” – Third Chinese Patriarch of Zen

The COVID-19 market crash and subsequent recovery has been atypical of previous recessions. Government lockdown brought economic activity to an abrupt standstill, but reopening as well as the fiscal and monetary response were just as decisive. In just a little over a year from lockdown, economic activity in the U.S. is expected to have exceeded pre-pandemic levels this past June and equity markets are well above pre-pandemic highs. This V-shaped recovery has the market running at a torrid +45% per annum rate since March 2020, with the S&P 500 up a robust +65% from its March 2020 close. Despite elevated unemployment in the U.S., many are warning of speculative “bubbles” based on the rapid rise of stretched valuations.

While the current market rally is impressive on its face, this month we look at historical trough-to-peak rallies to see how the current market compares with previous cycles.

Full Post

Just a Fad?

If you’d like to receive our market commentary by email every month, please click here.

May was generally quiet, and economic data continued to suggest strong momentum. In Europe, the pace of vaccinations caught up quickly and the heightened COVID restrictions originally imposed in April were relaxed. In the U.S., April CPI (released in May) showed a 4.2% year over year increase in CPI inflation, the fastest pace since 2008, though the Fed continues to hold that the rise is temporary and attributable to base effects from depressed readings a year ago due to COVID-19. With central banks and market participants debating whether recent inflation will prove transitory or persistent, this month we examine the performance of equities under various inflation regimes.

Full Post

Eyeing the Exit

If you’d like to receive our market commentary by email every month, please click here.

April was a relatively quiet month. The Fed reiterated its commitment to continue bond purchases and hold rates steady for “some time” until “substantial further progress” is evidenced in the economic data. President Biden released additional details on his $2 trillion infrastructure spending plan and made a strong push in his speech to Congress last week, focusing on maintaining U.S. competitiveness in the global economy and jobs.

During his April speech before a joint session of Congress, President Biden proposed raising the maximum capital gains tax rate from 20% to 39.6%. While it is likely that any hike will be less than proposed, some form of increase is likely to be implemented for fiscal year 2022. This month, we look at historical changes to the capital gains tax rate and its impact on equity market returns.

Full Post

Tsunami Watch in the Financial Markets

If you’d like to receive our market commentary by email every month, please click here.

The speed and magnitude with which fiscal stimulus was implemented in response to the COVID-19 pandemic was unprecedented. As shown in the chart below, Q1 2020 saw the year-over-year change in fiscal outlays increase 160% from the year prior (an 8 standard deviation increase) boosted by a $2.2 trillion stimulus package. Q4 2020 (not included in the chart) saw an additional $900 billion stimulus, followed by an additional $1.9 trillion passed into law last month. Attention now turns toward President Biden’s $2 trillion infrastructure and jobs plan and how that wave of spending may impact financial markets when it hits.

Full Post

Reflation on the Mind


If you’d like to receive our market commentary by email every month, please click here
.

February saw the swiftest repricing of interest rate risk since 2016, with the 10-year yield rising up to 1.50% from a low of 0.50% in August 2020. The “savage” sell-off of bonds only saw relief on the last trading day of the month. The move was accompanied by impaired market liquidity and a so-called “failed” 7-year auction (with the largest “tail,” or auction concession, on record: 4.4 bp). The 10-year repo rate fell as low as -4.25%, which means holders of 10-year Treasuries were paid 4.25% per annum to borrow cash against the notes as collateral. Commentators have speculated that traders were betting against the 10-year en masse in anticipation of a stronger-than-expected recovery. Anecdotal evidence suggests that the interest rate moves were exacerbated by Japanese investors, which sold $34 billion in foreign bonds ahead of their March fiscal year-end rebalancing.

Given the complexity and fast-moving pace of the current market environment, this month we analyze February’s violent rates market sell-off and what it may mean.

Full Post

No Appetite at the Buffet

If you’d like to receive our market commentary by email every month, please click here.

Given the magnitude of the Federal Reserve’s monetary easing in 2020, its commitment to holding interest rates low, and the multiple rounds of fiscal stimulus already implemented (with more coming in the pipeline), many are concerned about a rise in inflation in the near future. Conventional commentary focuses primarily on the supply side of the equation and the magnitude of the increase in money supply. The demand side of the equation is often overlooked, and this month we examine it.

Full Post

A View from the Yield Curve

If you’d like to receive our market commentary by email every month, please click here.

Equity markets are painting a confusing picture, trading at all-time highs despite the ongoing pandemic and its impact on the real economy. Indeed, the jobs report last week posted a larger than expected decline in non-farm payrolls.

This month we seek to situate current markets within historical business/monetary policy easing cycles and evaluate its implications for forward looking market returns.

Full Post

A Persistent Conundrum

Imagine being told on January 1, 2020 that the coming year would be plagued by a highly infectious global pandemic leading to global lockdowns, 14% unemployment at the peak, and over 22 million jobs lost. Very few would have guessed that the S&P 500 would end the year in the black, much less above its average long-run return of 10%. Yet as of writing, the S&P 500 total return index stands at +16.27% year-to-date, defying all expectations. This month we explain why we believe this to be the case and propose allocation strategies for the coming year.

Full Post

The Die is Cast

If you’d like to receive our market commentary by email every month, please click here.

A rocky October saw U.S. equities drop -2.66% going into the U.S. Presidential election. Negative sentiment from rising COVID-19 cases in Europe and the U.S., combined with the breakdown of Phase 4 stimulus talks and general election risk contributed to the decline. Economic data, however, was more upbeat. Q3 GDP printed at +33% (annualized rate on the quarter) and strong demand for single family homes and durable goods contributed significantly to the snapback. Service sector demand, however, continues to suffer from pandemic restrictions.

Turning to perhaps the most anticipated event of the year, the U.S. Presidential election continues to hang in the balance with vital swing states still within 1% margins in favor of Biden. President Trump has already gone on the offensive, initiating legal action in Pennsylvania and threatening it in other states. Just as important, but much less covered, is the outcome of the U.S. Senate election results. Last month we covered the likely market reaction to a drawn out contested election and this month we focus on the potential impact of a unified government on market returns.

Full Article

Twenty Years After

If you’d like to receive our market commentary by email every month, please click here.

In September, election risk came to the fore with President Trump refusing to commit to an orderly transition of power while casting doubt on the legitimacy of mail-in ballots ahead of the first round of debates. Developments since the end of September, in particular President Trump’s admission to Walter Reed hospital after testing positive for COVID-19, have further increased uncertainty surrounding the election.

This month we review market action in the weeks following the Bush-Gore election in 2000 as a guide to what may happen in the event of an uncertain or contested election. In that contest, on November 8, 2000, victory in Florida was declared in favor of George W. Bush with a margin of victory of only 1,784 votes. This triggered a statutorily-mandated recount that saw that margin decline to a mere 327 votes. A legal battle ensued regarding whether time consuming manual recounts would be allowed and through what date, with the Supreme Court of Florida ordering a manual recount on December 8, only to be overruled by the  Supreme Court of the United States on December 12, a mere two days after hearing oral arguments.

With the use of mail-in ballots expected to rise significantly in response to concerns over the risks of a spread of COVID-19 in connection with in-person voting, President Trump is already beginning to cast doubt on the legitimacy of this year’s election by attacking mail-in ballots as susceptible to fraud. We look to the Bush-Gore election for guidance on how markets may respond to a contested election result next month.

Full Post