Market Comment - April

Norges Bank Investment Management interviewed Stan Druckenmiller, former Partner of George Soros and co-manager of the Quantum Fund from 1988 to 2000. He replaced Victor Niederhoffer, a brilliant hedge fund manager and statistician. Both Niederhoffer and Druckenmiller are famous for their outstanding track record in investing. Despite his 45 years of experience, Druckenmiller says he has never witnessed a similar framework for investors, and the current economic landscape looks like a movie he has never seen. A lack of great investment opportunities keeps him from placing big bets.

Meanwhile, Victor Niederhoffer made an interesting observation. Since 1996, we have seen only 8 years where the S&P 500 and bonds have traded up during the first four months of the year. Unsurprisingly, it was during times of money printing, from 2010 until 2017. All years ended in positive territory. Surprisingly, that 4-month pattern exists this year as well. With only 8 observations, all clustered from 2010 to 2018, the margin of uncertainty is great. If we blend in another statistic, which says pre-election years are the most bullish for equities, the outlook should be even better, but peculiarly, it is not. Looking at pre-election years within the cycle of the past decade, 2011 and 2015 were volatile, ending the year with only small gains of 2.11% and 1.38%. Statistically speaking, if the pattern repeats, we will close the year up but down from the 8.59% the market ended with in April.

Currently, we are witnessing an unprecedented velocity of interest rate hikes, coupled with geopolitical tensions, a post-pandemic high inflation economy, and a fragile US regional banking sector. Looking at that framework, it is not hard to believe that central banks are closer to cutting rates than most professional investors believe. The first cracks in the economy are seen within the regional banking sector in the US, and the bond market, as well as crude oil, are seeing things that are not there or not here yet. The bond market is telling the Fed to cut rates, instead of hiking them further. Crude oil is trading exceptionally weak, despite OPEC interventions and historically low US inventories. Bonds have been trading relatively strong, despite resilient inflation numbers. Still, by the end of April, hedge funds have extended their short positions in 5-year and 10-year Treasuries futures to historic levels.

Investors should remember another statistic, one of the most reliable of the past decades: central banks hike and cut interest rates too late. This results in the recurring boom and bust cycles we have seen for decades. The coming months are infamous for weaker seasonality for equities. While the first-quarter earnings season was a reason to buy all companies that provided better-than-expected earnings, the coming months may provide a reason for investors to believe that we are heading for a worse-than-expected future.