“Calmness is the cradle of power.” J.G. Holland
The first quarter of the year has passed, and no commotion has occurred. Markets have continued in their calm trajectory following up on the same themes that characterized most of 2023.
Money continues to flow into quality names, mostly large cap profitable tech companies, and the US outperformance over the rest of the world also continues unabated. At face value, this is not entirely surprising given that earnings from the usual suspects have come in, so far, above expectations and that the much-awaited recession has yet to materialize.
Perhaps we are witnessing a historical anomaly or the best Federal Reserve that ever existed, finally able to engineer a true soft landing. Stocks, especially quality names, are in a nirvana state with a background of good earnings, stable rates, strong employment, and lots of cash on the sidelines that may be trickling into equities as even the staunchest bears capitulate.
Of course, valuations are now an issue with different multiples pricing in most of the good news. Tech valuations are back to 2020-2021 levels which put a lot of pressure on the upcoming earning season. Along this line of reasoning, the outperformance of growth stocks over value names is similarly quite large by historical standards.
We might also be witnessing a classic Presidential Cycle performance. Historically, Presidential election years tend to have a positive tilt as the incumbent administration enacts economic friendly policies to defend its position in power.
At the end of 2023, we gave a recessionary scenario higher probability on the account of higher rates, higher energy costs, prices plateauing at higher levels, and a dissipation of savings from the COVID days. We might have been early or just plain wrong. However, we still think caution is key at this juncture and an overweight in bonds represents a good safety net with good yields. We are also getting closer to that tipping point when high yielding cash should be converted into bonds where those yields could actually be locked in.
For the portfolios that can accommodate such an allocation, we also continue to recommend alternatives such as hedge funds with highly uncorrelated strategies.
As always, we would like to thank you for the renewed confidence in our work,
Youri Bujko
Davide Accomazzo