Note Précis October 23 ,2019: Shifting Sands – Balancing Absolute versus Relative: In late 2019, the markets are likely experiencing the shifting sands of time, in particular on the balance between relative momentum expectations in vogue amid quantitative ease since 2009 versus absolute standards that do need to be addressed. In this regard, market internals as well as policy perspectives have import. Across the world much is in flux in politics from internally to trade. Resentment over the distribution of benefits from growth appears worldwide. The late year assessments in 2019 from many central banks as well as traditionally the OECD, BIS and the IMF indicate not just slowing growth but also financial leverage fragility. Internal unease appears in the institutions.
The high water mark of fixed income markets, likely was set when 10 year German Bund yields notched a low of negative (0.71%) in the summer of 2019 in continuum of the likely yield low of 1.36% for 10 year U.S. Treasury Notes in the summer of 2016. In the first three quarters of this cycle, there appeared greater coherence in fixed income yields working lower which in turn attracted greater lax into credit assessments. We see now instead, a need for increased scrutiny of currency, ability to pay for companies and countries worldwide.
In most of this cycle in equities, beating of consensus has appeared to be paramount. Instead and across sectors, we expect greater scrutiny to emerge on absolute delivery as indicative of the robustness of management and of financial strength. For the S&P 500, operating earnings are expected now to show modestly single digit annual decreases and at best slim gains. At the company level in the key U.S. equity market and globally, sharp bifurcation is evident within sectors. In fact for concept companies, in recent initial public offerings or aspirations of such, stress has developed. In banking worldwide and even after a decade of restructuring, the strongly financed and managed appear gaining over many others not just lagging but also strongly struggling.
Notwithstanding announced further quantitative ease, the global equity market reality seems currently one of a sideways correction underway since late 2018. Risks of pullbacks appear irrespective of whether or not overall consensus is exceeded. Business change implies greater selectivity favoring absolute delivery via business segment leadership and financial strength. Until recently, consensus preferences appeared to be for lower quality companies buttressed by suppressed administered rates.
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.