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I sometimes have a dream where I somehow get to know all the headlines in advance so I can trade ahead of everyone else (who doesn’t magically know what is going to happen next) and so make money. I am just glad this didn’t actually get those headlines this week. The financial news has again been dominated by Trump and his tariffs – and yesterday it was reciprocal tariffs on anyone who tariffs the US. We also had US inflation coming in above market expectations on Wednesday and US producer price inflation doing the same thing on Thursday.
In response to this equity markets are up for the week and volatility (a measure of market fear and uncertainty) has fallen. And it is the most tariff vulnerable regions (China and Europe) that are up most for the year. Finally, after spiking when the inflation news was released on Wednesday, US interest rates are now more or less back to where they started. What is going on here?
I am reminded of one of Bob Farell’s 10 rules of markets (which he wrote in 1998 having retired as Chief Market Strategist at Merrill Lynch): “when all the experts and forecasts agree — something else is going to happen” (Bob’s 10 rules are at the end here for those that are interested). Trump’s tariffs plans were very widely trailed in his campaign speeches. And I was also very struck by this survey of Asian professional investors done at the start of the year asking them which equity market they thought would do best for the year:
Just 2% of the 200 or so surveyed thought it would be Europe. When you see results like this (and there was similar universal investor pessimism for much of 2022) it often pays to take the other side.
On inflation, we continue to keep an eye on energy markets. These are generally well behaved with oil trading at the low end of its $70-$90 range. And European natural gas and electricity prices have fallen 15% from their peaks in February, perhaps looking forward to some sort of Russia Ukraine peace deal. If commodities are a harbinger of inflation to come (as they were in 2021) they are not flashing red now.
It may be that the headlines finally get the better of equity markets and we get to see one of the sell-offs you expect each year as an investor. For now though, the thesis we started the year with – namely that if the US economy remains strong equity markets should continue to generate positive returns – remains intact. And my message to clients is markets are probably performing better than you might think than if all you did was read the headlines.
And here are Bob Farell’s 10 rules to finish. I think 1-3 are being challenged by the software revolution we are living through. We have had over a decade of US technology firms not mean reverting! Still they are always useful to have in mind when you are investing and I repeat them again here:
Rule #1. “Markets tend to return to the mean over time”.
Rule #2. “Excesses in one direction will lead to an opposite excess in the other direction”.
Rule #3. “There are no new eras — excesses are never permanent”.
Rule #4. “Exponential rapidly rising or falling markets usually go further than you think, but they do not correct by going sideways”.
Rule #5. “The public buys the most at the top and the least at the bottom”.
Rule #6. “Fear and greed are stronger than long-term resolve”.
Rule #7. “Markets are strongest when they are broad, and weakest when they narrow to a handful of blue-chip names”.
Rule #8. “Bear markets have three stages — sharp down, reflexive rebound, and a drawn-out fundamental downtrend”.
Rule #9. “When all the experts and forecasts agree — something else is going to happen”.
Rule #10. “Bull markets are more fun than bear markets”.
Chris Brown, CIO
cbrown@ipscap.com
The value of investments may fall as well as rise and you may not get back all capital invested. Past Performance is not a guide to future performance and should not be relied upon. Nothing in this market commentary should be read as or constitutes investment advice.
