Reflections on Global Markets - Money Life Show Interview on April 17th

Global markets have been increasingly volatile --- Is it time to gather our wits and seek out opportunities? You can find this interview at: www.StrategicCAPM.com/media or directly here.

Strategic Frontier Management's CEO & Chief Investment Officer was interviewed by Chuck Jaffe @MoneyLifeShow on Thursday, April 17th discussing, among other topics, how the COVID-19 pandemic is likely to effect the global economy and capital markets.

Highlights on our current global outlook:

We have emphasized the COVID-19 coronavirus from Wuhan, China is a global health crisis with geoeconomic consequences. We must not dismiss the threat posed by COVID-19, but we are pragmatic about how quickly we adapt to threats and know investor behavior too often exaggerates uncertainty resulting in overshooting. Such uncertainty often presents opportunities for the tactically nimble. Fear itself may not be the only issue for capital markets, yet it is likely we far overshot already. This threat is not a financial crisis, but a health security crisis unlike any other crises.

Investor panic has been unprecedented given equity volatility, despite inevitable transitory economic and financial market consequences. Thus, US equity valuations improved dramatically as the S&P 500 is likely overshooting equilibrium, even if the next quarter or two earnings are very uncertain right now, but bond valuations are more stretched than ever. Global bond valuations remain extended due to market manipulation, and negative real bond yields seem peculiar given economic conditions. Our global tactical models similarly confirm that global equities are compelling, but global bonds are a concern.

• Virus pandemic triggered a an unprecedented spike in global equity volatility driving equity corrections, as currency and bond market volatility also soared, and commodities declined led by plunging oil prices, while gasoline demand fell below levels not seen in 50-60 years ago.
• This transitory threat should not be have lingering permanent financial or economic declines, yet the world has suffered significant financial and economic effects.
• Threat is a health security crisis with globally self-imposed physical distancing restrictions by governments, unlike natural causes observed in previous financial and economic crises--such public policy choices offer options to expeditiously restore economic activity before permanent damage is done. This is not to say businesses won't be shuttered, including too many unsustainable or zombie enterprises that managed to hang on with exceptionally low borrowing rates, or loss of a material number of jobs.
• This crisis is unlike any other financial or economic crisis—consequences of imposed restrictions on nonessential activity affects overall well-being (aggregate public or economic good vs. public health)–no one wants virus to compound or double dip, and unlikely given growing immunity of increasing number infected, thereby recovered with immunity to virus (basis of plasma-based therapies in development and trial use).
• US economic growth could decline for 2-4 months beginning from March, but a technical recession (two quarters of negative growth) may or may not be unlikely. We caution that peak-to-trough observations can be of little benefit to investment decision-making that limit opportunistic tactical asset allocation. Specifically, games of recession probabilities and comparisons to other economic recessions (steepest or deepest ever!) are headline grabbing, but not very useful for practical purpose.
• Focus on economic cycle growth being: L, U, V, W, X (cancelled), Y, or Z (snoozer) -shaped is a bit silly and overly simplistic. The transitory economic collapse was percipetous, but the recovery will be staggered due to differences in geography and infection trends given the generally transitory nature of this economic shock. Most likely it may feel like a "U" or "V", but it is a difference without distinction, particularly as November election calculations must factor into the political calculus.
• This health security crisis is not a financial crisis, so it is not surprising that monetary stimulus is not effective and only increases financial imbalances that will be more difficult to unravel. Excessive fiscal spending only drive government further into debt--bolster unemployment safety net all you want, but cutting basic income checks to every household is foolish business that will be very costly in the future, if not setting a bad precedent. Key performance trends that matter are not peak recession or unemployment, rather the acceleration in growth being positive, consistent and sustained through the second half of 2020.
• Slower global growth likely will be held back by slow growth in Europe, Japan, and China even before the crisis, thereby could be more difficult to overcome given their existing structural headwinds in place before Q1/2020. Any notion of a new New Normal ("L") of prolonged subpotential growth is even less likely today than following the GFC, which as we have highlighted was terribly mistaken and even still is misunderstood.
• Our Global Tactical Asset Allocation (GTAA) return forecasts are not surprising. Although they include no-COVID factor or knowledge of the ongoing pandemic, their strong objective mean-reverting predilection often serves us well during such difficult periods of emotional behavior regarding wealth. Global equity markets are now very compelling, led by the US and UK equity markets (the later depressed further by 2019 uncertainty with regard to BREXIT), while global bond markets are likely to suffer negative real returns with a horizon of 5 years or more, depending on how efficiently equilibrium can be restored in the US, UK, and Japan (ref: worst of the worst), as well as most others. The only reason we can be more sanguine about Eurozone government debt is countries are cornered between Maastricht guidelines and already low potential growth until economic reform takes hold, thus the ECB may be years from being willing to raise interest rates. The US, UK, and Canada may well need to raise interest rates in 2021 after US elections, and as real growth accelerates, while inflation increases.
• We must not underestimate how quickly American society adapts to new threats and know investor behavior too often exaggerates uncertainty, resulting in market declines overshooting normal equilibrium. We assume in developing our forecasts that most restrictions restricting non-essential activities will be relaxed by May 4th in most regions of the country, and a few weeks after that for the rest of the country, but that is not to say there won't be certain accommodations or extraordinary behaviors of individuals still required---going to a baseball game, movie theater, or summer concert may not be possible until June or July.

The CoronaCrash marked the end of a remarkable equity bull market that began Mar. 2009, so nearly its 11th anniversary, but we believe we also likely marked the beginning of a new bull market within the same month of March 23rd lows at S&P 500: 2237.40 aren't revisited (closed at 2823 today or over 26% higher). Our presumption that peak investor fear should be observed by Tax Day or April 15th actually proved too conservative, albeit S&P 500: 2500 or about 14x very fluid earnings has been a better benchmark to consider. The global stock market is again compelling, but government bonds are even more overvalued, particularly after further intervention that promotes even greater explicit moral hazard.

The market is just -16.6% below the stock market's record level on Feb. 19th, and our current forecast suggests the equity market expects the S&P 500 to close above 3000 by year-end. Upside risk to that forecast has increased as likelihood of (smart relaxing of stay-at-home restrictions increase beginning May 1st or May 4th (following Monday) for a majority of states where infection rates are low with declining related hospital admissions. Americans anxious to get back to work certainly can do so safely, albeit with a keen eye toward monitoring trends or even certain additional precautions (PPE, temperature taking, testing requirements, immunity of a large population of recovered individuals, etc.).

US equity valuations improved significantly as the S&P 500 is likely overshooting equilibrium, but we must appreciate that the uncertainty of where earnings will settle out is a worthy debate, so timing and extent of any recovery will certainly impact investors' discounting of future earnings growth.

You will remember that we recently published a Strategic Insights on March 17th, Fear Itself of Geoeconomic Panic, which is available on our website (www.StrategicCAPM.com). Additionally, we have also posted our latest updated Q2 2020 briefing: Global Economic and Capital Market Outlook .

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Strategic Insights This publication is for general information only and is not intended to provide specific advie to any individual. Some information provided herein was obtained from third party sources deemed to be reliable. We make no representations or warranties with respect to the timeliness, accuracy, or completeness of this publication, and bear no liability for any loss arising from its use. All forward-looking information and forecasts contained in this publication, unless otherwise noted, are the opinion of this author, and future market movements may differ from expectations. Index performance or any index related data is provided for illustrative purposes only and is not indicative of the performance of any portfolio. Any performance shown herein is no guarantee of future results. Investment returns will fluctuate, and the value of holdings may be worth more or less than original cost. ? Strategic Frontier Management (www.StrategicCAPM.com). 2020. All rights reserved