Note Précis Jul. 24,2024: Q3/2024 –Eddies Swirl In Market Waters

Note Précis Jul. 24,2024: Q3/2024 –Eddies Swirl In Market Waters –

The role of risk premiums is to cushion against hitherto unknown developments and not just precisely defined uncertainties. Complacent market behavior has appeared in pining for minimal administered rates and momentum. Being seen are 12 month junk bond yield lows and feverish momentum in a tiny proportion of equites. We expect the role to rise of adequate risk premiums.

In geopolitics, within and between democracies and authoritarian countries relations appear in flux. Hot wars continue as do feints in Asia. Into U.S. November 2024 elections the leadership in both parties appears to favor tariffs. The Democratic Party with changed leadership is likely to still emphasize climate change, infrastructure and health with not rectitude but deficit management. The Republican platform appears favoring tax cuts, little regard for near term deficits but hopeful for consumer spending growth. From post Brexit Britain are lessons for the U.S. and globally well into 2026. It is about inward tilt stymieing prosperity. Unlike the early 1990s, there has been global political reluctance to discuss deficit management. Amid slow global economic growth in the 2½ -3% annual GDP range, it behooves capital markets not to ignore politics and risk premiums.

The capital markets appear focused on the rate of change of inflation. The broad parameters of central banks is on getting inflation down to 2%. over time. Inflation in expenses is of angst for many populaces,. Currently appears policy bifurcation with some central banks such as the Bank of Canada in the G-7 and the People’s Bank of China having recently opted for ease amid real estate pressures. Meanwhile others such as the Federal Reserve, the ECB and the Bank of England in the G-7 and others like India have opted for no change. Japan mulls tightening.  Amid policy bifurcation risk,  we expect currency volatility to flare. With geopolitical trade pressures amid slow growth and sanctions, we would be watchful for currency volatility. Within political watchfulness on the U.S. and trade, the currencies of Japan and China and others like Canada appear at levels bearing monitoring.

In asset mix, we envision a role for precious metals amid more currency turmoil than in the last cycle. In fixed income we would favor shorter duration. Amid large deficits, present consensus parameters appear to not fully appreciate credit quality driven facets. Consensus earnings for the S&P 500 appear at 10- 15% annually into 2024/2025, not implausible but above our 5-10% annual gain range. Sharper valuation expansion would be problematic. Yet to be proven during all three concept euphoria streams has been concrete delivery of revenues and earnings adequate to justify sharply elevated valuation.  

Considering our sector weight capped in Information Technology at 25% for diversification with market weight for Consumer Staples and the particulars of geographical weightings, we expect quality of operating delivery and strength of balance sheets to supersede. It is paramount over traditional growth versus value considerations. Also, we have underweight Communications Services and despite political cost cap risks, we favor Healthcare. In cyclicals, we favor Industrials over Consumer Discretionary. Amid systemic risk considerations especially from non-bank financials leverage, strong Financials remain key. E.o.e.