June 3, 2021
Good morning,
I’m sure you’ve noticed that the overnight futures market has been horrible at predicting the next days’ action in the cash market over the past few weeks. Each morning we wake up to a pleasant lift across the entire equity financial futures spectrum only to see those gains fade through the cash session and close with nothing to show for the effort. Maybe we’ll get the opposite today. Futures are off 1% broadly, ostensibly on a Russian announcement that their sovereign wealth fund would be cutting dollar asset exposure to zero. This isn’t the first time for Russia and there are those who question whether there will be any asset sales at all. It looks like no big deal. However, for traders there seems to be plenty of reasons to be wary of U.S. equities at the moment with the limp price action lately headlining that list, but this Russian announcement doesn’t look like one of them.
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For months now, in portfolios where it’s appropriate, we have been diversifying bond allocations into a three-pronged, programmatic real estate investment program. This is the brainchild of our CIO, Stuart Katz. A question around the recent price environment in suburban neighborhoods around the country bubbled up last week. Attached and linked here is the excellent response from Stuart and his Investment Office. A must read.
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And finally this week, a reprint of my monthly letter accompanying our client’s monthly performance reports going out today:
Months ago, as the current Bull market approached its first birthday, we began considering its life expectancy. Recall that about half of all bull markets end in their first year. With that condition answered, we considered the personality changes a bull market typically goes through moving from first year adolescence to second year adulthood. I think the biggest difference between early stage secular markets (Bull and Bear) and their older selves is all about the element of surprise. The biggest surprises come early. The latter years of a secular moves are more scripted – predictable. Think about last year’s bear market – no one predicted the pandemic. It was most unusual in that everyone was surprised. Likewise the ensuing bull market’s big surprise was the extent of Central Bank intervention and the tidal wave of liquidity injected globally – the biggest ever.
The personality of our 15 month bull market changed exactly as scripted on its first anniversary. The chart below represents 15+ months for the S&P 500, the NASDAQ Composite and the Russell 2000. The U.S. market broadly, large cap growth mostly in technology, and value/small cap stocks as represented by those indexes respectively. These three are the primary drivers of return for this bull market. Note the very choppy, rotating leadership, almost flat patterns in the 2nd year so far (inside the bubble) – it is proceeding as scripted. On the subject of surprise, many would argue that this year’s surprise will likely be around inflation. I think not. Will the rise in inflation, especially given May’s data, be transitory or persistent? The answer currently reads; yes! Inflation measures are numerous, some will likely prove transitory – used car prices for example. Wages by contrast will likely see the rise there sticking around for years. Inflation by degree is the unknown, hardly a surprise. Yields in bond-land haven’t budged in almost 3mo – inflation is hardly a surprise to their reckoning thus far.
Economic data was very strong in May and the ongoing vaccine rollout is allowing many economies to gradually reopen. The economic outlook for the second half of the year looks very bright – booming actually.
There are two big unknowns imbedded in the 2nd year script – magnitude and duration. How high the ultimate climb of the leading indexes, and how long will the script play. As we move deeper into the 2nd year, those variables will begin to reveal themselves. My hunch is that the market peak is not far away and the economic peak will follow it. That should be music to your bullish ears because we all know the value of my hunches of the past – zero! It’s why I moved to model-based investing years ago, and only regret not doing so sooner. At any rate, despite my hunch, the models say stay for now. So we stay.
Sources: Addepar, Bloomberg, JPM Asset Management, Ned Davis Research
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No note tomorrow, I hope you have a nice 2nd weekend of summer (unofficial).
Be well,
Mike