Note Précis November 4,2018: Salient Divergences from Past. The to-and-fro swings in equity markets and an unmistakable rise in fixed income yields from their cycle lows indicate a salient channel of divergencies from assumptions that until recently were commonplace in capital markets. A new level of uncertainty in Europe has been injected with a series of German state elections underscoring a populist anxiety. After vociferous mid-term electioneering that encompassed high immigration, trade, tariff and protectionism voltage but had little to say on deficits, the United States is likely to be at the cusp a new phase. Violence and strife appears with new avenues in the Levant. Still, politics and populism is not the only salient divergence from the past for the markets to consider for late 2018 and into 2019.
Despite above global growth in large population emerging countries like China and India, a decade of low interest rates and quantitative ease continuing in advanced economies (albeit now being tapered by the Federal Reserve), the ongoing worldwide releases of corporate delivery show a notable set of divergences even within sectors. Another salient aspect recently has been that amid moderating global growth and quantitative ease in the initial stages of taper globally and more so in the United States, yields in the fixed income markets are now being recorded again at closer to 12 month highs but this time also with CCC corporates being frog marched along. We believe it to be a question of time before higher yields are recorded in many sovereign bond markets.
We agree that corporate delivery divergences have not been just a recent phenomenon but in fact have been underway for several months. Still, changes in fixed income markets and the elevated valuation of equity markets are likely to make such divergencies subject to heightened investor response. The ebb and flow of corporate reporting has been in current play in the United States and is likely to remain in play as reporting expands throughout the world, from Consumer Discretionary to Information Technology to the Financials to name but a few. These divergences in revenue guidance can be discerned within and among most sectors and among most geographies. We believe more selectivity is likely than was complacently espoused at the apex of quantitative ease when focus was intense by many professional and individual investors on risk on/risk off or ETF rotation and on many other investment tactics
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