Julio López (Attitude Gestión SGIIC)| Wittgenstein, the Austrian philosopher who took British nationality in 1939, was once in a train station talking to a friend. Suddenly, the train started to pull away and Wittgenstein ran after it, managing to get on. Behind him stood his friend on the platform.
-Don’t worry, madam,” said a station attendant, “there’s another train leaving in ten minutes.
-“You don’t understand. He had come to see me off.”
Investors work in the markets in the same way, they get on trains that they often don’t know where they are going, or they change their route because of the same lack of logic. Let’s try to summarise what is happening in the economy and its interpretation in the financial markets. The reality is that in the last month there has been a sudden change in investors’ view of the market. It was something we had already discussed a month ago that could happen, and its genesis has more to do with market positioning and seasonality than any other macroeconomic issue. A month ago there were large and widespread bearish positions in both bonds and equities. The train was heading south without a brake, and suddenly, a change of tracks redirects the train northwards, causing the market to hastily close out short positions. If we look at immediate history, we see that seasonality is strong and vigorous. In 2019, the SP 500 went from 2,952 points on 4 October to 3,234 at the end of the year. In 2020, the release of the COVID vaccine took the stock from 3,269 on 30 October to 3,756 at the end of the year. In 2021, it was 4,357 points on 1 October and ended at 4,766. History repeated itself last year with a rise from 3,583 on 31 October to 4,071 on 30 November. The only difference is that last year’s high was reached on 30 November, coinciding with the closing of the hedge funds’ books. As we can see, it is a process that repeats itself year after year, even if we try to dress it up with macroeconomic excuses.
We should therefore interpret the movement from a technical and not a fundamental point of view, and we should not rule out the possibility that we could end the year at record highs.
The market’s justification is generated by two clear trends. On the one hand, the end of rate hikes by Central Banks is taken for granted and on the other hand the “unmitigated” victory in the fight against inflation. We have doubts about both assumptions. The market is betting on a return to the Central Banks’ old ways with immediate interest rate cuts, which we see as a long way off. And if they are not, we would have to think that things are getting much uglier, which would make it difficult to buy shares.
The market has bought the soft landing lottery ticket, but as we have seen this year for the opposite reason, market consensuses are almost never right, and if one thing is clear to us it is that the Socratic principle that we have no idea what might happen to the economy, must be the basis of our analysis.
The year 2023 has been a rare year in which the “lagged data” have not fully materialised as we have already seen, but that does not mean that they have been eliminated. Vigorous public spending has allowed the economy to fend off the ghosts of recession that could come from brutal interest rate hikes. However, we believe that many of the effects of these rate hikes will materialise in 2024, as refinancing takes place. The year 2024 is going to be the highest year in the history of financing needs for European companies, for example. Those who did their homework three years ago by borrowing at long-term fixed rates have also been rewarded by financial investments of their cash surpluses at much higher short-term rates. It remains to be seen whether this new version of FOMO (risk of missing out on a hike) will last, because I doubt that the central banks will buy back this lottery ticket. In addition to such brutal debt rollover needs, we have to add that these Central Banks are far from returning to a size of their balance sheets that could be considered as normal (although they have reduced their stock of Treasuries from a peak of 24% of the total issued to 17.7% at present), and at least for a while they will leave their debt investments unrolled and some other player should fill the gap. So far, with the October data, we have seen how the Central Banks of China, Japan or Saudi Arabia have continued to unwind their positions in US bonds at a significant speed. This may also have repercussions on the curve, and we may think that long term rates will show more resistance to fall than short term rates.
The market will buy (for the moment) the “goldilocks” argument, and will be calm with macroeconomic data reflecting some cooling, fuelling expectations of lower rates. The funny thing is that if we go back to history once again we have to be careful what we wish for. The stock market cataclysms of 2001 and 2008 started precisely when we were already engaged in aggressive interest rate cuts.
Economic data are beginning to show some slowdown, but by no means indicate a recession. It is striking that the American Leading Indicators Index (a compendium that takes into account money supply, labour data, activity data and even the performance of the stock market) has been falling for nineteen consecutive months, and that at the same time (remember that this is the slowest data) employment indicators are beginning to move away from the historic lows that we have been marking.
If we return to the theme of seasonality, next year we have an American presidential election year, and if we forget 2004, they have all been accompanied by stock market scares. The year 2000 the bursting of the Internet bubble, 2008 the financial crisis, 2012 the American debt limit, 2016 Brexit and fears of the arrival of Trump (although later the market, in one of its particular dribblings, came to see only the good things) and 2020 with COVID. Cyclicality is certainly not an invitation to rejoice.
For the time being, I think we will see a formidable fight in Congress to prevent the Democratic government from using its spending machine as unrestrainedly as it has been doing so far.
A trend of what may start to happen can be seen in last week’s results presentation by the giant Wal-Mart, which sees consumers beginning to slow down their purchases in fear of price rises, and even mentions the term deflation after a long time. We will see if the excess savings resulting from the pandemic have already been used up.
The next key question we will have to answer is whether the market will continue to rely on the Magnificent Seven (you know, all those related to Artificial Intelligence) or will we see some contrarian betting as we saw in 2021. Of course, the US market remains off-track in terms of valuation and well above its historical averages. In Europe, however, valuations do not seem very high, but they have to contend with the permanent glaciation of their economy.
Spain, that country whose Jobcentre offices have two sub-offices, the autonomous community and the state one, but the one who reports is the Prosegur security guard…
