What is missing from the optimism of the market | Financial Times

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Good morning. IS Katie Martin. Exciting Times: Rob is on a gap year this month. It’s one of the best perks of working at the FT, even better than the popular weekly cake cart (only available in London offices).

While he is away, I am one of the people invited to help out. I am tempted to use this opportunity to make a fan of the glorious Lionesses or destroy some of Rob’s most cherished beliefs about his lovingly curated platform, such as extolling the virtues of the Birkenstocks. He hates them and is wrong. This is a hill on which I will die.

We will meet again next week. In the meantime, say hello to katie.martin@ft.com or complain about things to ethan.wu@ft.com.

Mixed market stories

Nobody knows what the hell is going on. Or at the very least, market participants are demonstrating extraordinarily high levels of intelligence by keeping two opposing ideas in mind at the same time. Let’s say it’s the latter.

This observation, by Adam Cole, a currency analyst at RBC, is surprising and sums up the point pretty well. The chart tells you that, yes, investors think the Fed will continue to raise interest rates from here (see the blue line), but also that very soon after it’s done, it will start hacking them again (the black one):

This is strange, “completely unprecedented”, in fact, in Cole’s words. He adds:

Markets have never priced in a significant Fed easing in two years while the Fed was still in the midst of a bullish cycle.

So, you’re not imagining it. Right now we are really swimming through powerful cross currents. The dominant theme is shifting from doom / despair to cautious optimism at some point, which makes sense given this apparent confidence that the Fed will ramp up to hurt him.

For now, cautious optimism is winning. Shares in global developed markets jumped nearly 8% in July, in part due to some resilient gains from tech megastacks that still have (dangerously?) An inordinate influence on the broad direction of the market.

To make sense of this, again, several conflicting things must be true at the same time. Recessions (the correct ones) must be well, actuallybecause of all the easier monetary policy they entail, and / or the spike of fear has passed and / or the markets have already priced in sticky inflation and hard landing.

Perhaps, like UBS Wealth Management, people munched on the numbers and thought that waiting and seeing is for the weak. From UBS Wealth Chief Investor Mark Haefele’s Friday note (my highlights):

Today, after a 26% downgrade over the past 12 months, the S&P 500 is trading at a trailing price-to-earnings (P / E) ratio of 18.3x, a level that since 1960 has been consistent with annualized returns in a healthy range of 7-9% over the next decade . . .

The idea that waiting can be riskier than investing immediately it is also reflected in historical data. By 1960, a strategy that waited for a 10% correction before buying the S&P 500 and then selling at a new all-time high would have underperformed a buy and hold strategy by 80 times (yes, eighty). Over the same period, an investment strategy immediately following a 20% decline would have produced an average one-year return of 15.6%. Staying in cash for a year after a 20% drop has a significant opportunity cost.

Sure, but there is a real danger of overthinking all of this. As Luca Paolini of Pictet Asset Management points out:

Keep it simple. Equities and bonds are rebounding mainly because the first half of 2022 was the absolute worst in terms of real yield. Worse than 1932!

His graph here of how a theoretical 50/50 portfolio of US stocks and government bonds would have performed for nearly a century quite pounding at that point:

A graph by Luca Paolini showing how a theoretical 50/50 portfolio of US stocks and government bonds would have performed in nearly a century

Whatever the cause, this rally could eat its tail very quickly. Brighter markets mean easier financial conditions, the opposite of what the Fed wants to see, especially after consecutive rate hikes of 75 basis points. All of this gives the Fed a step to slow down even harder.

Readers with short-term investment horizons may still be tempted to see how long it has to last and good luck to you. Investors with longer game plans are generally less inclined to try to be a hero. A few days before the last Fed’s alleged dovish pivot, I asked Sonja Laud, LGIM’s chief investment officer, if the equity markets had already capitulated, if it was time to be brave and get in.

“For me there is no rush,” he said. “Some large goal posts are moving. We have never really appreciated the value of globalization [that we saw] after the fall of the Berlin Wall and the dissolution of the Soviet Union. . . Just-in-time supply chains have been a huge boon to consumers globally and to the profitability of businesses around the world. ”

Now, globalization is not exactly dead, but it is wearing out, reshaping profitability and inflationary dynamics. “We’re hailing the post-World War II American-led order that we all took for granted,” she said. “It’s history in the making.”

Seen through that lens, it seems premature to declare that this bad period in the markets is over. The process of figuring out how to cope with supply chains and inflation in the face of biting geopolitics will not be quick and the false dawns will catch investors. All the clichés are true: stay humble, stay agile.

Capturing Katie’s attention

The growing bet is that the Bank of England will raise rates by 50 basis points this week, as BoE Governor Andrew Bailey previously hinted. Making 25 basis points is a pre-coronavirus pandemic.

Everyone hates Europe. “Investors take a new, positive look at Europe” is a staple of financial journalism. I know this because I have written or personally edited these stories on several occasions. Right now, however, Europe is really struggling to keep a fan club. Goldman Sachs said Friday that it thinks the Euro Stoxx 600 has another 10% down this year. “We believe the market in general is too pleased with the weakness of growth and the risks associated with Russian gas supply and Italian politics, which are skewed to the downside,” wrote Sharon Bell and colleagues at the bank.

Unlike every other major stock index, the FTSE 100 is now positive for the year. The first person to tell me this is the Truss effect will get the hardest of looks.

If you haven’t already, read this, about the Russian economy. It’s not nice. Top line, always with my highlight:

A common narrative has emerged that the unity of the world in resisting Russia has somehow morphed into a “war of economic attrition that is straining the West”, given the alleged “resilience” and even “prosperity. “of the Russian economy. This is simply not true.

If you can handle it, look at the myriad ways the crypto industry complex relieves people of their money and “Meet the ‘psychic’ cryptovoyants who sell bitcoin information to thousands of people.” (Vetted, with a heroic definition of ‘information’ there.)

A good read

We can’t get enough of Neom, the partly fun and partly insane desert megalopolis of Saudi Arabia. His design jumps between “the dystopian empire of the Death Star, the apartheid architecture of a post-apocalyptic security city, and the rendering of a fascinating and unlikely central business district looking for gullible investors,” writes the critic. of architecture of the FT.

Cryptofinance – Scott Chipolina filters out the noise of the global cryptocurrency industry. Sign up here

Marsh notes– Expert insight into the intersection of money and power in US politics. Sign up here

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