Momentum beats mean reversion
Life comes at you fast, as they say!
Incredibly enough it was less than 3 months ago that critics were lambasting Trump and his tariff policies for crashing the stock market and costing investors tens of thousands in the process...
You could pick any number of opinion pieces from April, to be fair, but here's one from Bridgewater highlighting a "once-in-a-generation" economic shift, and in turn exceptional risks for US assets:
Fast forward to late July and US stock markets have not only completely recovered from their drops and then some - with the S&P 500 rising from below 4,900 to nearly 6,400 - they've been comfortably breaking all-time highs, underscoring just how impossibly difficult it can be to predict short-term trends in markets.
The Shiller PE or CAPE ratio is now touching 39, which is the highest level ever seen outside of a heady year or two at the peak of the Dot-com bubble.
Other measures of stock markets such as forward and trailing 12-month PE ratios are also trading at historically high levels, with US markets up by nearly 80 per cent from their lows in October 2022.
In short, risk appetite is well and truly back.
The
Wall Street Journal reported this week that in the space of only two months small companies have raised US$43 billion in capital, not to grow their businesses, but to buy crypto (and a total of US$86 billion since 1 January).
Interestingly this has all been happening at a time when long-term bond yields have been rising in the US, UK, Europe, Japan, and Australia.
There are legion potential explanations, mostly centring around money printing, longer-term inflation risks, and general fears around currency debasement.
I've heard a couple of anecdotes over recent months of friends of friends quitting their jobs to trade tech stocks and crypto full time (and without being unkind, these folks don't exactly exactly have unblemished track records when it comes to being contra-indicators).
Albert Edwards of Societe Generale said that one thing he can state with 100 per cent certainty is that when the everything bubble pops "everyone you meet will say that it was obvious".
But that doesn't mean it's about to pop imminently either.
Perhaps I've been particularly attuned to this as I've been in the UK of late, where frankly the budget and government borrowing have been blowing out alarmingly, sending the 30-year gilt yield all the way up to 5½ per cent, while the FTSE 100 has simultaneously blazed to all-time highs of above 9,100.
Something will have to give.
In the meantime I'm off to Edinburgh this week, so may be blogging only intermittently, but will make an effort to get around to looking in some detail at the Aussie Q2 inflation figures.
The median market forecast is for trimmed mean inflation of 0.7 per cent, which would take the year-on-year figure for core inflation down from 2.9 per cent to 2.7 per cent.
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