Note Précis July 11,2018: A Question of Balance – Equity markets extrude large index level point moves. A question of balance still prevails. It includes that between transactional activity versus a long term strategic focus. This balance has been under pressure. It is so not just in politics for instance in the rise of populism in decrying immigration or in pressuring trade relations between nations. It also lies in the interplay between short term momentum and longer term benchmarks of value for markets. For instance, equity markets need to come to grip on whether longer term, recurring and replicable (for example ex share buyback) corporate earnings growth has sustainably been elevated. In fixed income markets, it is on whether capital has become so sustainably plentiful and risk so low as to maintain yields far below the long term averages incorporating varieties of financial conditions over the decades, or for British data over the centuries.
On geopolitics and stability, ongoing warfare in the Levant, the induced stresses within NATO and G-7 amid a lack of benchmark specificity over Russia and North Korea relations add risks to growth, when combined with the global rise of populism. Positive trade and political initiatives occurred in the late 1940s with greater activity globally and then again in the 1990s. Recent trade tensions are seemingly ignoring that technological change and that moving up a value added chain remain crucial to growth and prosperity.
Prolonged and massive quantitative ease may have distorted the role in indicating direction of pricing in capital markets. Especially as the strong form of efficiency has proven deficient, changes in consensus about risk could be both abrupt and lurching. Helped by quantitative ease earlier in this cycle as earnings bounced off the bottom, markets responded in 2009. They then expanded valuation even as earnings expectations were serially reduced to easily beaten levels. Now, global responses appear volatile despite for the S&P 500, strong operating earnings growth accruals for Q1/2018 and well telegraphed close to 20% year-over-year increases for Q2/2018, stimulated by tax cuts and energy recovery. Volatility lurks below the surface in our favored areas like the financials, energy, and info tech as well as in underweight consumer discretionary and staples. In a decade old business cycle, the present corporate preference for massive share buybacks to restructure balance sheets has yet to be tested, excepting in energy, under more adversity. Emphasis on quality is likely appropriate.
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.