I was in New York this week for JP Morgan’s investment strategy sessions. The attendance was high as was the interest in the group’s perspective on where things stand and where this Market is headed. A Common concern was the role ETF’s are playing today. They seem to be actually driving stock and bond prices, rather than the opposite, natural relationship. There was a big divide between those that are very Bullish and others that are extremely Bearish. That’s what makes a Market.
Slow and steady has been the theme for the US economy for a while. Growth has been consistent but unspectacular. 3% never used to be fast growth, but this isn’t like the old days. A funny and telling line by JP Morgan Global Strategist David Kelly was; “The US economy is a tortoise about to get some sugar.”
Tax cuts are coming. That was the consensus. It might be early next year. Republicans are motivated to get something done before the midterm elections. The Market has always wanted tax cuts. The Corporate rate is coming down to be more competitive on the global stage.
The global economy is now growing the fastest it has in 6 years. International stock markets have been playing catch-up and are poised to continue to outperform the US. Inflation has been pretty tame. The global economy doesn’t belong in intensive care anymore.
A common belief in the group was there has been terrible fiscal policy around the globe. Massive liquidity injections and negative interest rates have created asset bubbles. It has impacted traditional assets like Stocks, Bonds and houses, as well as new, digital assets like Bitcoin. The prevailing opinion was, this won’t end well. But most seemed to believe it will last a little longer.
A big question right now is who will be head of the Fed next year. Very few believe it will be current Fed Chair Janet Yellen. The consensus was split between Fed Governor Jerome Powell and Stanford Economist John Taylor, with Powell being the safest and smoothest transition.
Why no correction? Everyone wanted to know but nobody knows. Perhaps investors don’t want to sell ahead of tax cuts. Besides, where would the money go? Interest rates are still so low. Bonds are not very attractive at current yields. Cash still pays nothing.
With a Stock Market that continues to move higher, especially the statistically insignificant DOW, we still think the growing risks are not being accounted for. Risks are high with these elevated prices. It sure hasn’t paid to be defensive yet, but it will. Earnings continue to be solid, which is the foundation of the rally. Amazon and Google proved it again today and stocks moved. If things are so positive and strong, why didn’t rates move higher today? The Bond Market keeps telling us things are far from perfect. The change at the Fed and the fact that the central bank will stop aggressively buying bonds will certainly create disruption. Not to mention the geopolitical issues at hand. Hang on for the ride.