Welcome.This is the first edition of No hedge, FT’s new email that arrives in your inbox on weekday mornings. The topic is the market, and the people and businesses that live and die from the market. Here, I would like to combine the rigor of analysis with an easy-to-understand, blank opinion to have fun and enjoyment. Please join us.
Last week’s Wild Week?Get used to it
last week doozy..Last week Poor work report (Good for the market as the economy is cool and monetary policy is likely to be loose) Prepared for Wednesday’s breakout Inflation report (Hot, bad, tight).Then it turned into a week for all of us worry Learn more about inflation.
Stocks, especially growing stocks, were trampled like drugs in biker rallies. Nasdaq fell 5% between Monday morning and Thursday afternoon. Bond yields have risen. Then on Friday, the fear disappeared, and things were almost back to normal. From my Reuters terminal:
Where does it leave us this week? Take a deep breath.
The market likes to overreact and seems to have overreacted to its inflation rate. My ex-colleague Matt Klein of Barron’s made a simple case to settle down. More More than 60% of the increase in inflation from the previous month is due to the kind that is expected to be just temporary. “Used cars and trucks, hotels and motels, airfare, car insurance, car and truck rentals, live events and museums, and dining away from home.”
Yes, we need to pay attention to wage increases and other sticky inflation indicators in the coming months. No, it’s not time to go crazy.
A bull who likes this point. This is the Chief Investment Officer of a private bank. Quote By colleague Katie Martin:
Bears are always looking for signs that the world is about to end. They come up with all the potential excuses. In reality, the only important question is whether the restart will work. And that’s ok.
Bears are certainly stupid! (After all, for 10 years, they didn’t follow one simple investment rule you needed: buy it when you see US stocks). But besides the widely accepted bear stupidity, there are at least two reasons why the market is in the shadows. One is short-term and the other is long-term.
The short-term reason is that the market is quickly and aggressively discounting the accelerating economic growth that accompanies the reopening. But it will soon discount slowing growth. Here’s how Omar Aguilar, CIO of Schwab’s multi-asset strategy, told me:
We are living the fastest cycle we have ever seen. .. .. The market expected an unprecedented recovery and GDP growth last year. Given the slowdown in GDP, the market will outpace it. A pullback is expected to be seen when the peak of growth is reached — the peak of this cycle will be reached before we know it.
Aguilar believes peak growth may be several quarters ahead. Others think it’s happening now. Here’s an estimate of the Goldman Economic Team’s quarterly GDP growth (the figure is mine, I don’t know):
The hedge fund boss I used to work for said: Always look at the quadratic derivative. It’s more fun to invest if growth is set to accelerate rather than slow. Here’s what Strategas’s talented economist Don Rissmiller emailed me about the future slowdown in GDP:
The second quarter could be the peak of US real GDP growth. .. .. Corporate and personal taxes may increase in the first quarter of 2022. This means that when the New Year begins, not only will growth slow down temporarily, but it may slow down to below-trend growth. At the very least, the pace of vaccination slows down (leaving the possibility of another seasonal health problem by winter), large financial thrust passes, and the Fed may start a tapering conversation a year. Risks increase over time, and tax increases.
Does it scare you? Yes, me too.
Now, a long-term point. This is a chart that was run on FT a few weeks ago. piece By Karen Ward of JP Morgan:
The relationship between valuation and subsequent long-term returns is incomplete, but as strong as any other forecast relationship in the market. We know that if we know something, buying a very expensive market will not make much money in the long run. And, as it is currently being evaluated, history says that the money we invest in today will not return anything for the next decade, without giving or taking a few percent points each year. is showing.
Ratings are useless or even worse to tell you when to sell. If you sell and miss a moment of euphoria at the end of the bull market, it is almost certain that performance will decline over time. There is no reason why you can’t do a face-melting rally from tomorrow.
However, knowing that you have to own a stock in the short term and cannot reasonably expect a good return in the long term is an investor’s nerve formula. Get used to a week like last week. It will be a strange few years.
One good reading
Just finished noise, Daniel Kahneman, Olivier Siboney, Cass Sunstein.Not as great as Kahneman’s towering book Think fast and slow, But that is a very important point. Randomly scattered errors (noise) in our judgment are at least as damaging and common as those predictable non-random errors (bias). Mainly thanks to Kahneman, smart investors are always thinking about bias and how to eliminate it. They need to think about noise as well.
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