September 24, 2016
Less Control for a Few Doesn’t Mean Less Return for the Many
I spent the first two days of last week in New York for manager and media interviews. In conversation, I found that the typical Wall Street “groupthink” had become atypical “group confusion”. Fears around politics, central bank policy, terrorism, computerization, secular economic stagnation and various black swan sightings, permeated dialogues. Frankly, the level of apprehension surprised me. Perhaps the common denominator underlying the trepidation is simply, a loss of control. For so long, the major money center banks, investment banks, institutional investment firms and media mouthpieces selected winners, losers and market direction. Today, market influence has decentralized and scattered worldwide. Wall Street's capital advantage remains, but its information advantage and front running capabilities have diminished significantly. This has reduced "smart money" returns up and down Wall Street and increased career uncertainty. The point? If you find it difficult to square the markets achievement of higher highs with the popular pessimism, recognize that less control for a vocal few may darken the commentary…but this doesn’t mean less return for the many.
For those interested in seeing this angst on display, peruse the video links by clicking here from CNBC's Delivering Alpha conference.
The Central Bank Two Step
While the Fed’s interest rate decision received the most media attention, the Bank of Japan's announcement held the most market weight. Why? Because the Bank of Japan acts as the world’s monetary mad scientist. With Japan's population aging and shrinking at the same time, overcoming deflationary forces requires unprecedented monetary policies. In fact, the Bank of Japan has been so aggressive with its present asset purchase program that it is running short of stuff to buy with all of its newly minted yen. By subtly acknowledging this fact in their "comprehensive assessment" Tuesday night, the BOJ signaled a stealth tightening of sorts, which levitated the yen vs. the dollar. Since a weaker US dollar correlates with higher global asset prices, the BOJ's statement initiated a global market rally that rolled across Europe and onto US shores...impatiently awaiting confirmation or denial from the US Fed.
On Wednesday afternoon, the US Federal Reserve confirmed the global rally by sticking with its current interest rate target and by lowering future rate policy projections (see chart above). Within the commentary, they did leave the door open to a December rate hike, but given their “cry wolf” tendencies, markets only price those odds at 50%. The swift reaction lowering in the US dollar created follow-on surges in commodity and asset prices worldwide. Of the three voting members who advocated a rate hike, two will be rolling off the committee shortly and the third worries specifically about commercial real estate prices in Boston. Frankly, given the downbeat forecasts for economic growth, the Fed remains squarely on hold, as we expected.
Where from here?
This market could rally strongly given the bullish combination of three key conditions. First, earnings should grow nicely next year if oil stays put. Second, valuations can climb further if interest rates stay put. Third, low investor sentiment levels should rise if the first two conditions are met. High levels of cash and low equity allocations could boost prices significantly as the skeptics are converted. What would threaten our Santa Claus rally? A dollar rally. But with the BOJ and the Fed dancing beautifully together, the dollar appears anchored…for now.
Bottom Line: The Bank of Japan and the US Central Bank's combined policy statement mixed nicely to weaken the US dollar and boost asset prices world-wide. Talk of rate hikes once again proved unfounded as the Fed’s own longer-term growth, inflation and interest rate projections fell. The global economy may suffer from aging demographics and trade and economic policy impotence, but as long as the US dollar and interest rates remain anchored, asset prices will remain buoyant. Don’t let the negative “Nancy’s” get you down!
Have a great weekend!
David S. Waddell
CEO, Chief Investment Strategist
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