Market Comment April
Norges Bank Investment Management interviewed Stan Druckenmiller, former Partner of George Soros and co-manager of the Quantum Fund from 1988 – 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 Neiderhoffer made an interesting observation. Since 1996, we have seen only 8 years, where the S&P500 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 exist also this year. With only 8 observations all clustered form 2010 to 2018, the margin of uncertainty great. If we blend in another statistic, that 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 repeating the pattern, we will close the year up, but down from the 8.59% the market ended in April. Currently, we witness an unseen velocity of interest rates 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 Cenrtral 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 seing 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 is resulting 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.
Market Comment March
Volatility picked up in March, as the market witnessed two bank runs, that did not bode well for risky assets. The failure of a Silicon Valey bank and Credit Suisse spooked markets and the trouble at those two financial institutions were quite exceptional. SVB Financial Group’s customers withdrew USD 42 billion from their accounts in one single day. That's USD 4.2 billion an hour, or more than USD 1 million per second for ten hours straight. It resulted in the biggest bank run in US history. In the case of Credit Suisse we currently don’t know the exact numbers. While the source of trouble resulting in a bank run usually is a lack of confidence by depositors, the failure of SVB Financial Group is the result of clients realizing, that they can earn more interest in the money market, than on deposit accounts in the bank. Meanwhile, the National Bureau Of Economic Research in the US reported, that the U.S. banking system’s market value of assets is USD 2 trillion lower than suggested by their book value of assets. If held to maturity, those losses are not relevant, but if a bank needs an excessive amount of liquidity, those losses have to be realized. To avoid this, the FED openend the Bank Term Funding Program, as well as the Discount Window Lending, where banks receive liquidity, for the full amount of the bond held on the balance sheet. Unfortunately, interest rates to be paid on those loans are 5%. A bank using those programs will face exploding interest rate costs. The program can keep a bank from going bankrupt immediately, but it is moving it to a Zombie Bank. The Fed has prevented a bank run from spreading, but there is a systematic problem within small banks, revealed by the recent events. Regional Banks have only 29% of cash and securities available for the funding programs. Loans make up 65% of assets, and those loan portfolio’s are loaded with commercial real estate credits. CRE credits are currently what worries Wall-Street. If clients continue to remove deposits from regional banks, the odds are high, that we will see more bank failures this year, revealing the true value of CRE credits. The collaterals at large banks have higher quality, credit portfolios are safer. While there is no life threatening situation in the US for large banks, profitability will certainly suffer. The uncertainty emerging from the events described above has led to a massive drop in interest rates for Treasury Bonds. Lower interest rates coupled with the liquidity injection from the Central Bank has led investors back into risky assets, especially so called “long duration assets” which can be mostly found in the Nasdaq Index. While the Russell 2000 lost 4.81% during the month of March, the Nasdaq 100 gained 9.25%. Equity markets could again profit fromstrong seasonality for the next couple of weeks, while riding the wave of the pent-up demand is coming to an end.
We are happy to announce the joining of Mag. Robert Cup. Robert is a Certified Financial Planner (CFP®) with over 20 years of experience in private banking, he will add valuable insights and know-how to our team.
Market Comment February
Ruchir Sharma, chair of Rockefeller International, wrote in an article for the Financial Times, that equity markets are trading in an echo bubble. The market echo is just like an audio echo that repeats and diminishes over time. Serial disappointment kills the faith. In the last 10 bubbles there have been an average of four echoes. The largest echos, which saw a 30.00% price gain on average, lasted three months and were then all given up. On a more positive note, economic data released in February was much better than expected. Job reports and Purchasing Manager Indices are showing a picture of a resilient economy in the US, as well as in Europe. Furthermore, inflation data was stronger than expected, prompting several Fed officials to warn of a potential higher terminal Fed funds rate for the cycle, which investors expected to rise to roughly 5.4%. Still, the odds are for only a 0.25% rate hike during the next Fed meeting on the 22nd. of March. If we would calculate the Fed funds rate according to the Taylor Rule, the appropriate terminal rate should currently stand at 8.00%. It could well be, that Central Banks are not very honest at the moment, claiming that their main goal is, to bring inflation back down to 2.00%. During the last rate hike cycle from 2004 – 2007, the largest debt was held by US consumers and US financial corporations. Due to a complicated shadow banking system, the Fed was not able to fully understand the amount of leverage running in the system. Today, the situation is different. While the debt situation looks better for the consumer and the financial sector, the debt burden has moved to Governments balance sheets, to an extend we have never seen before, while non-financial corporations debt levels have moved to alarming levels. While households and the financial sector have deleveraged, they are certainly far from being at confortable levels, but a crisis emerging from those two components of the economy, seems pretty low. The most uncofortable part is run by Governments, which also tend to influence Central Banks. The resilience of the global economy against rising interest rates may come as a surprise for some, but ultimately, most companies are currently working off order backlogs created by bottle-neck issues and lock-downs. This accordion effect may last for another quarter, but in the end the high level of interest rates and debt, will bite into the economy, sooner or later. Seasonality may be the most comforting factor for investors in the current year. Pre-Election Years have given investors a positive full- year return during the past 100 years with two exceptions, 1931 and 1939. The current year is following seasonality pretty well. If correlation prevails, we should see positive returns for equities during the months of March and April. This does not mean though, that equities can avoid high volatility until the end of the year.
We are happy to announce the joining of John Lochrie. With over 30 years of experience in Private Banking division, he will add valuable insights and know-how to our team.
Clavis Partners AG includes Investment Navigator
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We are happy to announce the joining of Dipl. Ing. Andreas Tosner. With over 20 years of experience in Swiss Private Banking, he will add valuable insights and know-how to our team.
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Market Comment January
There is a strong agreement among investors, that equity markets had a surprisingly good start into the new year. While the mood in 2022 was dominated by recession fears, selling undeserved equity overvaluations and raising fears of Central Banks overtightening, 2023 is showing a spirt of Goldilocks in Lala Land. The current narrative is, that inflation will recede rapidly, and growth will once again accelerate, enabling markets to remain in the bull market of the past decade. The ongoing weakness in the commodity space is supporting the view, that inflation, after all, is transitory and was only a bad dream. Investor’s behavior continues to be driven by fear and greed, despite the knowledge that emotions are leading to bad results, especially, when it comes to investing. Fact is, that the largest combined monetary and fiscal experiment in history is ending and a major growth slowdown is coming to the US and Europe. The structural imbalances in the commodity space remain in place and could get even worse during this decade. For most of the past decade, unusually easy monetary conditions allowed a bevy of zombie companies to expand to near biblical proportions. It will take much more time, to uncover them all, and in the end, remove them from financial markets. We are living in a very complicated world. A good comparison, how difficult a macro trade can be, is the crowd of professional investors in 2005, which firmly believed, that the US Housing Market will crash, latest in 2006. Having been 18 months into that short-trade, the average loss of a Hedge-Fund, betting against the Housing Market was around 35.00%. A silver lining on the investment horizon was the February meeting of the US Central Bank which hiked interest rates only by 25 bps., reducing fears of overtightening. Despite having the FED Fund Rate far below the current inflation rate, Jerome Powell thinks, a slower pace in rate hikes is warranted. Time will tell. Usually, you can’t have the cake and eat it too, meaning, saving the economy while killing high inflation has never been achieved by a central bank. The strong performance of equities in the current year can be mostly attributed to valuations. During Q4 2022, a lot of sectors were priced for a recession. Now that recession fears are receding, valuations are on the rise again. It will be a complicated year for investors. The odds are high, that some cyclical parts of the stock market have been punished too hard last year and that the economy will do better for longer, than most expect. Believing that financial markets will return to the Goldilocks-era of the past decade is probably wrong footed. As Howard Marks wrote in his December Memo: The world of investments is witnessing a sea change, which will have a substantial impact on returns and the way people will have to invest in the coming years.