Monday, the markets where positive for a possible truce to the trade ‘war’. Tuesday, the market responded to Trump’s tweet that he is ‘a tariff man’. Perhaps there was never much to celebrate in the first place. It does though, buy both parties some time.
Another factor to explain the sell-off is yield curve inversion, which is a harbinger for a slowdown in the next few years. The yield curve has though been close to inverting for some time and is already inverted for a number of markets. So, we don’t see that as a real trigger.
There does though, appear to have been some rebalancing by risk parity funds which may have been exacerbated by algorithmic trading and trend followers.
S&P, DJ and Russell all down over 3% on Tuesday. The charts tell the story well:
Of note is the 50 and 200 dma acted as a resistance….
Google’s performance is also instrumental, as it is such a bell weather of the market and of the Technology sector. Again, the 200dma acted as resistance.
We haven’t changed our view. It’s time to be cautious and sell into the rallies, expecting 2019 and 2020 to be difficult years.
We have been advocating buying into mid duration (4-5yr) US Treasury debt and this has played out reasonably well. See our last Insights. A safe play, with a 2.75% yield. We are not yet going long duration (10yr or longer) as we see the markets and interest rates still being fairly volatile. We do though, anticipate that the Fed hasn’t that much further to go in terms of rate increases. At least that is what the curve is telling us.
In addition to becoming more bullish on US treasury debt, we are also looking at managers that can provide short exposure to markets that we think are increasingly vulnerable, such as Australia. Fewer buyers, a declining property market, tighter lending standards and a shift from interest only to interest and capital repayment will likely, in our view, push that market into recession. That is of course assuming we don’t have a massive shift in current policy and a large liquidity injection from China. Central banks are still a force to be reckoned with, so care needs to be taken as to how to short any market. Keeping the bets small is perhaps the best.
We are still holding onto some of our China technology names which have started to perform a little better and outperformed relatively on Tuesday. That’s a good sign. These are just a trade though.
Another area that seems to have the potential for upside is Silver. We already like Gold as a long-term hedge, but Silver is trading at levels seen in 2016 and as far back in 2009. With the gold silver ratio at record highs, having some exposure to this metal as a ‘beta’ play on gold seems to make sense.
The chart above and that of the gold price and recent movement lower in yields all reinforce the idea that inflation is not seen by the market as a risk. We would concur. Indeed, debt overhang is an issue and the mal-investment over the last few years is likely to come back and haunt many market participants. We have been reducing our credit exposure accordingly.
Be safe out there.
A little about the title image – this is typical example of the multi-cultural nature of United World College. My son attended a number of their campuses and graduated from there. My wish is that there were more schools as multicultural as this. If they were ubiquitous, war could be a thing of the past. There would far greater global engagement and understanding.
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