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MARKET UPDATE All trends eventually end
I haven’t been around long enough to call it a career but I have seen a lot and traded through “the crisis” from a front row seat. Historically you can draw some compari- sons to this market environment, many of them are a little scary, but there are no comparisons for measuring the impact of recent central bank activities. Even those market participants that have been around for 30+ years will struggle to quantify the impacts of intervention and the coming unwind. We will be entering uncharted territory in the next 12-18 months as this recovery gets formally introduced to the back end of central bank interventionist policies. Quantitative easing (all three phases)
and “Operation Twist” were welcomed respites from their beginnings and beyond, but all relief comes with a cost and I don’t think we will like the bill when it shows up. I would argue that some pieces of that bill have been getting paid for a while, in the form of lower returns for fixed income investors. I do not think at this point the markets have accounted for the fact that the biggest buyer of assets in history is about to be the biggest seller in history. Orderly or not, the deleveraging is going to reverberate and sting. I think the markets have focused on
the new administration objectives which can be summarized for our purposes as deregulation and tax reform. One could surmise the greatest corporate beneficiaries of these objectives would be in leveraged finance and small cap stocks. If you want
to use the Russell 2,000 index as a proxy for at least one of those two groups the first cracks might be starting to emerge as it has failed to sustain the recent record levels hit in late April. It seems odd to me that in a market
dominated by thousands of highly intelli- gent participants we can overlook so many potentially negative headwinds. I think the catalyst for the next move in rates and equities will be something that already exists but will finally be evaluated in the proper context. To use a grammatically in- correct phrase “It is what it is until it isn’t”. It is painful to watch asset prices improve quarter after quarter if you are not in- volved. Buying begets more buying, rallies occur because of prior rallies, but it should be noted that those the animal spirits can work in the opposite direction as well. Te new administration and the
European ‘noise’ over the last half decade have certainly given the markets a case of political crisis fatigue. We have been conditioned to brush off many of the challenges facing the domestic and global economies but at some point that will change. I wish I knew if rates were going to spike higher because of the unwind or if they rally because of the safety trade. What I do know is that all trends come to an end. When the next big move starts I can envision the native St. Louisan Yogi Berra opining “Liquidity ain’t what it used to be” and that’s going to make paying this tab sting even more.
...at this point the markets have accounted for the fact that the biggest buyer of assets in history is about to be the biggest seller in history. Orderly or not, the deleveraging is going to reverberate and sting.
ARTHUR W. SPELLMEYER, President, CEO First Bankers’ Banc Securities, Inc.
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