When I first started my career 6 years ago in equities sales, I was very quickly taught by my then-boss (and still a spring of wisdom today) of the importance of looking through the noise of the crowd.
One simple rule for making money: buy low, sell high. And to find the lows is like shopping for straw hats in winter.
Harder than it sounds. But not impossible. Going long Southeast Asia in 2015, buying Mining equities in early 2016 and positioning for an Indian bull market post demonetisation were some of the right calls guided by that principle.
Of course, sometimes it goes very wrong – like the dividend yield trade. But with hindsight that was in not keeping with the rules. Shopping for yield in 2016 was a mistake born from not recognising the fundamental change in the world.
The US market is recovering, Trump notwithstanding. And the Fed’s stability mandate suggests rates are by no means lower for longer in the face of growth.
More importantly, the Fed (and all other central banks) have shrinking relevance in today’s world. They stopped being relevant when the BoJ went for the NIRP bomb (great NY Times article on the Negative Interest Rate Policy here), and the world realised central banks had no more bullets left in the monetary policy gun.
Unfortunately for yield investors, growth is back in the US. It’s not back in a big way (yet) but the gradual advances of the Trump administration (tax cut – funded by… a border adjustment tax??) make it clear that Fed or otherwise, the long end of the UST curve is heading up.
Lest we forget that central banks’ monetary transmission mechanism is a mechanism, not an end-result in itself.
But what of the broader market? The S&P trades at almost 18x forward earnings, and while US data seems to indicate better growth, the mood on the ground is skeptical.
How can the market still be heading up and rallying so hard after all that has happened? Trump’s bound to trigger a recession at some point!
Perhaps… or perhaps not. The S&P is at all-time highs, and showing signs of exhaustion. For sure it needs a break; the question is how long this break will be.
Consensus says it’ll be quite a long break – the tail risk is that the sell-off is shorter and shallower than we expect.
Update: spotted this in Barron’s last night, an interesting argument for why S&P multiples can keep expanding.