Note Précis Mar. 6, 2024: A Quest for Balance

Note Précis Mar. 6, 2024: A Quest for Balance – Early 2024 has contained massive upswings in capital markets, globally and across segments. Still, the global political environment from wars to trade to elections is the most tense since the end of the cold war and arguably since the end of World War II. In a quest for balance, market risk premiums need not solely the last decade but longer periods. Consensus seems fluid but amplified in expecting early ease. Globally, central banks appear preferring data dependent but slow change. It has been reemphasized on March 6,2024 in Congressional testimony by the Federal Reserve with its rate at 5 ½% and post its meeting by the Bank of Canada with a rate of 5%. Elevated volatility is likely.

Globally both amid multiple elections and for command economies, a fraught political environment appears. Into November 2024 U.S. elections, in a rematch of 2020, appears stalemate on budgets, bitterness and Congressional dysfunction. In China’s National People’s Congress from March 5 2024, challenges appear of asset deflation but also increased information technology and defense priorities. From Latin America to Europe to Asia are elections with fiscal discipline appearing secondary. Wars have exposed immediate and long term defense spending imperatives. Flexing perennial subsidy demands, rioting by farmers appears widespread, with sticky inflation a risk. Short term pressures to manage finances may be secondary but sovereign debt risk premiums hang in the balance.

At $79/Bbl. WTI with actively managed output, crude oil prices are not low. Its cost impact exists on operating margins, notwithstanding momentum markets. With annual global GDP growth of 2 ½-3%, key European countries like Germany in recession and both the U.S. and China at well below precredit crisis growth, revenue growth can be expected to be fractured and challenging still. Stronger growth in India and Southeast Asia are likely not to be a complete offset. Meanwhile, global defense spending schedules have increased as has subsidies cacophony in politically vocal agriculture. Since late 2023, with price gains encompassing a variety of existent balance sheet leverages, capital markets appear expecting central bank sustenance, especially in Federal Reserve policy.

The primary modus operandi has long tilted to ETF type activity and leverage across capital markets ss, but selectivity looms. Into 2023 as Federal Funds rates rose, relative valuation characterizations and corrections did arise. Since then, momentum has been buttressed by expectations of early rate cuts. Even reduced earnings gains seemed celebrated on meeting consensus and exuberance on Artificial Intelligence (AI) participation. On evolution from concept to robust delivery, recent experiences in ESG participation has lessons. In AI, one weakness is of modelling inadvertently reflecting preconceptions of the constructor. Cyber security can seep into fake/criminal/political interference. 

In the Information Technology coterie do appear strong balance sheets and operations, likely giving rise to expectations about strong AI delivery. Still, the close to twelve month lows in junk bond yields can be attributed to expectations of relief in business pressures. Both indicate complacency. As in cycles immemorial, both globally for SIFIs and smaller regional or centric entities, the hard truths for capital markets will likely come overtime in bank loan loss provisions.

We favor diversification among asset classes and especially in equity exposure. E.o.e.