Testing the Market’s Mojo

Always remember: narrative follows price. This maxim holds in markets in much the way that Monday’s sports columns always tell you exactly why Saturday’s contest turned out as it did  – even though this erudite analysis typically confounds the PRE-match call of the same Harry Hindsight now gamesplainin’ matters to you.

So it is today as the first real hint of fatigue appears in the overbought, overwrought Tech/Growth stocks which have dominated the charge this past year. Ironically, the pundits’ fixation on FAANG-TSLA fibrillation has led many to overlook the fact that Value is making new highs, as is the equally-weighted Value Line index.

Thus, the I-Told-You-So crew are out, frantically casting the chicken bones in the attempt to tell us -fully post hoc, of course- WHY this is now happening.

In looking for an excuse, the fact that government bond yields are rising from Depression level lows – if not from historically unprecedented ones – have garnered many advocates. An over-indebted world cannot bear such stress, they wail, blithely ignoring that fact that junk continues to prosper with bonds rated CCC or lower now returning barely 7% nominal for a real, expected return (via 5-year BEI) of a paltry 4.7%, less than half last year’s pre-pandemic 9.7% mark. Leveraged loans are also back in demand, allowing many borrowers to demand favourable repricings, while SPAC issuance is already over 60% of 2020’s all-time record volume.

All of which goes to show that, even if Uncle Sam is not finding quite as many willing sponsors, speculative-end finance is not seeing any sort of cyclically-lethal squeeze just yet.

Seizing upon another measure now moving in a direction helpfully able to bear a malign interpretation, bond vols are also now being cited. Here we really do have to look askance at the argument, though. Yes, the MOVE index is up, but from QIV’s record lows to a point still >1sd below the long term mean.

But you don’t need to take our word for it. As inventor of the index, Harley Bassman himself, wrote in a recent commentary:-

“As the calendar rolled into 2020, the MOVE Index was under 50 while the more widely watch VIX Equity volatility index was kissing 12. There are no reasonable statistics to comprehend such levels, they are just too low.”

Stocks may be inflated, but those doing that inflating (central banks) are by no means ready to quit – as Jerome Powell has been at pains to explain this week. Tech & Treasuries may no longer be viewed as the best way to reflect that in one’s portfolio (as we have warned they would not, since the summer), but what we have here so far is a rotation, not a repudiation of the thesis that too much money is going to chase too few outlets for quite some time to come.

The power of narrative being what it is, this does not rule out the chance that a darkening of the mood relieves buyers of some of their enthusiasm in the near term and so entrains enough additional slippage to seem to validate the bad interpretation now widely being put on a reading of the entrails. In such a scenarios, as the chorus of naysayers swells to a crescendo, their apparent prescience could serve further to erode the bag-holders’ resolve in a circle of self-fulfilling gloom.

More directly, leverage being what it is, a further faltering of the lead bulls of the past year’s wild stampede could easily see the newer pacemakers (commodities, EMs, junk) being frantically being thrown overboard in a forlorn attempt to stop the ship from foundering. Such is the way with speculative markets: up by the stairs and down by the escalator.

The prudent investor should therefore be prepared for such an eventuality, trying his best to ensure that any such back-reaction does not suck him into the vortex, too. He should also try to persuade himself that a sell-off would have to be very deep and very comprehensive for it to represent more than a temporary allayment of the powerful, secular shift to higher prices brought on by determinedly incontinent fiscal policy and the fawning central bank accommodation of the finance ministry’s extravagance.