May Day or mayday, mayday, mayday? (our May 1st client note)
Waiter, there’s a bear in my free lunch...
It has become customary for our May updates to discuss the well-worn market
aphorism, “Sell in May. Go away. And don’t return until St Leger’s Day”.
However, this year, we prefer to focus on our theme that post-pandemic markets are marching to a new, discordant, arhythmic beat.
“Diversification is the only free lunch in investing” –Harry Markowitz
The shutdown and re-opening of developed western economies and capital markets during the pandemic disrupted financial and economic behaviours.
The usual market trends were replaced by a bullwhip effect or series of amplifying waves, like the ones shown in the diagram on the right.
The unclear current state of economies and investment markets is a consequence of this disruption, alternating between indications of resilience and weakness.
This has led to increasingly polarised positive and negative interpretations of these data. This effect is also exacerbated by market reactions to these data.
Good news = bad news, bad news = good news.
Upbeat data might usually be viewed as a positive indicator for corporate earnings and for asset prices. However, we have seen positive data increasingly greeted with negative market reactions. This is because these have sometimes been interpreted as providing justification and encouragement for policymakers to continue tightening monetary policy (i.e. raising interest rates), in response to the potentially inflationary consequences of stronger data.
Policymakers such as the FOMC (the policy making committee of the Fed) need little or no encouragement to pursue this agenda.
Weaker data has received a positive response from market participants on the basis that policymakers might not raise interest rates further or might even cut rates.
This applies up to a certain point.
It doesn’t apply when the news is so negative that the potential damage to corporate earnings outweighs the expected benefits of rate cuts.
In this case, then bad news = bad news.
The ideal situation for investors is data that are soft but not too soft.
This reminds us of the fairy tale of Goldilocks and the three bears. Goldilocks tried the bed of each of the bears until she found one that was ‘just right’.
We get very worried when investing strategies sound like fairy tales.
Other issues also worry us today.
Measures of equity market volatility have subsided from the extreme levels of the pandemic, but they are still high by historic standards.
Relationships between different asset classes that have been in place for many years are breaking down.
This has serious implications for cross asset volatility and correlation.
Our April review and May outlook is available to non-clients on request.
MBMG Investment Advisory is licensed by the Securities and Exchange Commission of Thailand as an Investment Advisor under licence number Dor 06-0055-21.
For more information and to speak with an advisor, please contact us at info@mbmg-investment.com or call on +66 2 665 2534.
About the Author:
Paul Gambles is licensed by the SEC as both a Securities Fundamental Investment Analyst and an Investment Planner.
Disclaimers:
1. While every effort has been made to ensure that the information contained herein is correct, MBMG Investment Advisory cannot be held responsible for any errors that may occur. The views of the contributors may not necessarily reflect the house view of MBMG Investment Advisory. Views and opinions expressed herein may change with market conditions and should not be used in isolation.
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