Note Precis Jun 14 2024: Fractious Environment Requires Steady Hand Central Banks

Note Precis Jun 14 2024: Fractious Environment Requires Steady Hand Central Banks – Well into 2025, capital market selectivity is more likely than is an encore for momentum. We suggest diversification in equities and short duration in fixed income. Since the breaking of the $35/oz. compact over a half century ago, Gold bullion has recorded just over 8% gains per annum. An unintended effect of enacted sanctions/ currency policies may have been to stimulate direct central bank ownership of bullion reserves. We favor an asset mix role for precious metals.

Several events appear likely to stimulate reapplication of bonus risk premiums that in the 1980s/90s augmented credit spreads and flowing into equity risk premiums. Into mid2024, wars and border disputes have expanded. Within and among democratic and autocracies have appeared fractious pressures. They have differing origins but do appear stoking volatility. Still flowing, the electorates in the democracies appear expressing protest about their situation to newly or reelected incumbents of whichever stripe, size or geographical region. Upcoming in July are stress tinged snap French and British elections with the U.S. one due  November 2024.

Adding to domestic populist pressures exist geopolitical, trade and tariff tensions amid global GDP growth only 2½-3% annually.The so called peace dividend has been spent. In many countries, quantitative ease and minimal interest rates appear not to have engaged fiscal restructuring. Now appear major policy needs to address electorates feeling left out and increased defense requirements. Amid fractious change, stirrings in currency markets appear.. Fiscal dissonance and international spreads could also increase currency stresses, as already existent in Japan. Fiscal and monetary priorities potentially appear in flux. It is likely to require steady hands from central banks

Momentum markets have appeared driven saliently by the interpretation of central bank policy largesse. The central bank focus has been on data and inflation of 2% being achievable. The FOMC meeting ended June 12,2024 left Fed Funds unchanged at 5.50% and which could still be 5% in mid2025. Likewise, U.S. 10 year Treasury Note yields are well above their 2021 lows but are likely still to be 5%. Recently, the Bank of Canada and the ECB have cut rates. The Bank of England is to meet on June 20,2024.The Bank of Japan appears tentatively moving to tighten ultraloose postures. Change  appears for the currency milieu existent since 2008.

Readjustments are likely to flow still into most sovereign and other bond markets. For even the G-7 in the mid-1980s, policy dissonance caused severe market breaks and exposed weaknesses arising from excess complacency about seamless give-and-take. In capital markets, it is the tail end push that often attracts angst. While political and other tensions unfold, in Fixed Income allocations, we favor short duration.

Geographically, equity markets appear acutely linked to perceptions about U.S. Fed Funds rate policy. A few stocks have appeared dominating momentum. Similarities appear to a previous purvey of emergent and unseasoned markets being subject to the whims of momentum. Whether based on premiums on risk free rates or on a P/E and earnings growth interface, valuation seems high.

The latest momentum tryst has shifted from alternate energy as challenges in earnings delivery cycles came to be appreciated. It then shifted to social media with similar delivery as opposed to usage challenges. It lately has been linked to artificial intelligence, arguably incorporating sustained several fold earnings gains compared to the S&P 500. Yet, competition in Information Technology remains Darwinian. Life cycles of competitive advantage have been shortening. Instead of the traditional interface of value versus growth, we favor selectivity, quality of delivery and balance sheets with reduced leverage. 

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