Summertime unwind ??????
Hey there, hope you're having a great summer!
So I was a little late getting on board with this year's Olympics (not till the opening ceremony and usually there's more of a build up than that, isn't there?). But I'm now certainly in full swing and will be gutted to see it finish, topping my personal charts of the most unexpectedly compelling sports this time round is the 3x3 basketball (have you seen that court?!) and the fencing. The latter possibly because I have watched a good amount of it in France, and they seem to be quite good at it so cover it well, although they were on the wrong end of a couple of heartbreakers. The tension in the latter stages of some of those fencing matches was intense! I even listened to one on the radio, with French commentary, and was hooked.
Can't not mention all those puffy puffas in the swimming final walkouts too ("arctic gangsta" was the most accurate commentary take). Honestly there's just too many great stories to even start to cover properly, it's just been great, hasn't it?
I can confirm the Economist's take that the French "seem to be shrugging off their studied glumness and reaching for superlatives as if for a bottle of chilled summer rosé". It's true, the good vibes are real.
Quick shoutout to French hypermarchés which truly must be the GOAT of supermarkets, who knew that a rainy morning's entertainment could be provided for little people letting them loose in Hyper-U with mini trolleys and illustrated shopping lists!
Markets mumble
A lot's happened since my last update in early July. As ever the question is what's noise, what's meaningful. A quick recap of key points -
The Fed was on hold last week, with a September cut expected. The Bank of England did cut, we had all the earnings reports, and we had US economic data (jobs reports, PMIs and unemployment) which showed some weakening.
What started off being called the long-awaited "rotation" in mid-July as small cap stocks ripped higher turned into a tech-related "unwind" and latterly a full-on market flash crash with a few different contributory factors.
Recession headfake or real thing?
The US Labour market has been loosening steadily for a while which has been more seen as a normalisation from tight levels but when does a normalisation turn into genuine weakness? We've seen this toggle a few times this year. The slowdown scenario is coming back into play a little, but it's one data point.
A 12% drop in Japan stocks first thing Monday triggered a bit of panic with the VIX spiking up to 60+ levels not seen since the covid selloff. Things have moderated a bit in the days since then with a lot of the ground in Japanese stocks being made up. Seems to be a combination of factors driving things here - some legit concern over a slowdown in the US meeting some technical unwind of yen carry trades and the dreaded vol gamma situation.
Duration has been rewarded - 10 year yields have taken a nosedive down below 4% in both the UK and the US which is at or close to the lowest levels since the start of the year. Ebb and flow that we've seen all year of cuts getting priced in and out.
It felt like Monday folks were prepping all the Buffett quotes that you usually get early in the selloff (the Munger and Bogle quotes come later). Joe Wiggins was there for us with the right way to think about these sort of events -
The truth is that financial markets are a complex, chaotic and deeply intertwined beast, which makes both predictions and explanations impossibly difficult. Not that this stops us attempting both. For most investors a rationalisation of events doesn’t even matter – markets are volatile; sometimes uncomfortable and inexplicable things occur. What’s more important is what happens to us during bouts of market turbulence. This is where the real damage is done.
As it stands we're back to early-May levels in global stocks, up about 7% for your global indices, about 8% off the highs. Japan and Emerging markets are a little worse, back to almost flat for the year.
And on the bond front duration heavy funds like gilts and treasuries saw a sharp move higher but have since given some of that up and are still negative YTD. Those shorter dated bonds are still winning YTD.
the dramatic spike in VIX was pretty odd, from Garry Mackay commenting on Linkedin: "According to the VIX, the worst market events of our lives were the 2008 financial crisis, COVID, and the?Bank of Japan raising interest rates by a quarter percentage point!"
For further reading and thinking through this two of the best quick-take notes I've seen from strategists include Kristina Hooper (link) and Wei Li (link - and look at the reactions on that post!). The gist of both is that the vol move looked like an overreaction, recession fears tend to ebb and flow but may be overblown now and corrections happen especially in markets that have risen a lot.
One final point I'll make is just the importance of having clear investment beliefs and objectives to navigate times like this and avoid getting caught up in unhelpful second-guessing or triggered into bad decisions.
Markets aside it's been awful following the news headlines in the UK this week on all the violence and intimidation. Solidarity with those folks really feeling it at this time. Good to see some of the headlines today looking a little better.
Three things I'm reading
Just don't say you're 100%. Why ?
...But markets swing more than economies and companies.?Why??Because of the importance and unpredictability of market participants’ psyches or emotions.?.... I can illustrate the greater variability of markets, as follows:
40-Year Standard Deviation of Annual Percentage Changes
GDP 1.8%
领英推荐
Corporate profits 9.4%
S&P 500 price 13.1%
Why is it that stock prices rise and fall so much more than the economies and companies that underlie them??And why is it that market behavior is so hard to predict and often seems unconnected to economic events and company fundamentals??The financial “sciences” – economics and finance – assume that each market participant is a homo economicus: someone who makes rational decisions designed to maximize their financial self-interest.?But the crucial role played by psychology and emotion often causes this assumption to be mistaken.?Investor sentiment swings a great deal, swamping the short-run influence of fundamentals.?It’s for this reason that relatively few market forecasts prove correct, and fewer still are “right for the right reason.”
2. The Active Management Reinvention Project (link) by Tom Brakke at the Investment Ecosystem.
Some useful thinking points here for anyone who's pondered on the future of asset management. A key idea is that simply "defending" active management in the form it's existed in for the last 20 years isn't the move. But what is?
“Active management” is a big tent that includes a broad range of strategies and organizations.
For the most part, stories about active management being under pressure concern traditional vehicles like mutual funds and long-only separate accounts.? Underperformance versus benchmarks, the relentless shift of assets from active strategies to passive ones, and the increased adoption of alternatives have all eroded traditional active management franchises.
The active management business has been so good for so long that there is a strong bias to follow the same path as before.? Although change is inherent in a complex adaptive system, other than an increased use of technology, active management looks much like it did a quarter century ago.
Active managers haven’t felt the need to innovate; given the profitability of the endeavor, there wasn’t any great advantage in bucking convention.? Consequently, a remarkable sameness came to pervade the craft, with little differentiation from firm to firm and across time.? That can be seen by looking at the marketing collateral across managers.? It is mostly interchangeable in form, and the stories on offer often seem indistinguishable from one another.
No silver bullet answers but some worthwhile points around culture, differentiation, technology and human capital.
I think it does speak a little to the way we are trying to think about asset managers as broad partners across things like research, systems, innovation or insight rather than simply providers of product hoped to outperform.
Two things I'm listening to
One thing the market gets wrong is the market routinely puts a long term multiple on a short term surplus that has materialised when increased demand meets inelastic supply . But not a sustainable position , causes noise in market pricing . Prices a temporary surplus. Saw it in commodities in mid-2000s, saw it during Covid. Maybe seeing now in chips and in power consumption. Might be right on growth rate over 2-3 years, but not permanent but gets priced
US vs rest of world was thought of as a cyclical wave but that’s being challenged . “We were all brought up to be mean reversionists” US big tech a little over long term average valuation pricing but not instantly obvious that people are losing their minds.
An interesting note from Goldman's that puts together some of the nuanced but negative case from a markets perspective around AI today - you can read the note or listen to the podcast:
Current LLMs have outperformed expectations can predict the next word better than many thought, and will benefit productivity, but no-one ‘s seriously thinking we get a general intelligence in 5-10 yrs. it’s all a time horizon thing . Investment booms will partly be wasted and partly lay the seeds for future advancements.
There's a trillion dollar spending going on, what trillion dollar problem is it going to solve? Different from other tech transitions as solution is v expensive and so doesn’t make sense to replace low cost labour.
Grab bag -
This is getting a lot of interest, exciting times - Rachel Reeves to announce plans to create ‘Canadian-style’ pension model (ft.com)
Animated chart with a difference that puts a new spin on looking at compound interest by showing the proportion of final wealth arising from contributions made in a saver's 20's. tl;dr, it's a lot - Animated Chart: The Benefits of Investing Early in Life (visualcapitalist.com)
For true long-term thinking, the local village in France is this year celebrating the one thousand year anniversary of the local castle, first constructed in 1024 to defend against the viking invaders who came in the wake of the fall of Charlemagne's empire.
Eat the croissant, jump in the water, drink the rose. That's my summer philosophy and I'll be focusing on that the next couple of weeks! Enjoy your August, October's just around the corner.
It's interesting to consider how unpredictable events like flash crashes can impact asset management strategies. What role do you think adaptability plays in navigating uncertainty in the financial markets?
Consultant
7 个月When you run a long-biased proposition (an investor), being sanguine and long-term is precisely the right call.?Pound cost averaging and compounding are part of a wise list reading "stick with the plan". However, there are many who, although long biased, might not be able to be quite so sanguine due to health and age.?They need a bit of risk for income (or as much as ATR will allow!). The point is that these corrections matter, especially if they continue for a bit.?It's fine to say all will be well over ten years, but what about the next two years? I feel that the recent (last few years) extreme upside moves in risk and Tech concentration - arguably aided by the money pumped for Covid - will take some time to clear through the system. That means investors should be more cautious, "less risk, and more cash". To use a sailing term "rig for bad weather".?I am not expecting the ship to sink, but I believe a more cautious approach would be wise.
Principal at The Investment Ecosystem
7 个月Thanks for including my posting, Dan.
Chief Market Strategist EMEA at J.P. Morgan Asset Management
7 个月Great note as ever Dan. The US is slowing, though I don't see anything to suggest it's going to get ugly. The problem was that the market in H1 had started to price in 'no landing' rather than 'soft landing' which was never realistic. I interpret much of what we've seen as a healthy removal of over optimism. Note coming shortly. Hoping your summer proceeds well.
Senior Visiting Fellow, Bayes Business School, City St George’s, University of London | Independent Trustee | Investment Committee Chair
7 个月Great summary of all contemporary topics as always Dan. Human behaviour never ceases to amaze me, especially when effectively based on a single data point - swallow and summer!