For Wall Street sceptics arguing the good times can’t last, there is plenty of supporting evidence. Equity valuations are stretched, corporate bond spreads are tightening and gold is at a record.
The result has been a rush to hedges — options and other instruments designed to protect gains already in the books.
Alongside all the prudence, though, a vocal subset of managers has emerged whose outlook is decidedly less wary. Despite the headwinds facing investors at this point in the economic cycle, they say there’s reason to believe it’s still early in the bull run for risky assets.
One is Nancy Tengler, who helps oversee US$1.4 billion ($1.83 billion) for Laffer Tengler Investments in Scottsdale, Arizona. Convinced corporate earnings growth is greater than it seems thanks to a steep falloff in inflation that is also bolstering consumers, she’s pushing clients out of Treasuries and into a broader list of bets on municipal bonds, electrical equipment makers and utilities.
“The growth is there and it’s still driven by the consumer,” she said. “Earnings season will be pretty robust. We will see more surprises to the upside than to the downside. We are very bullish.”
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Stocks rose again this week, with the S&P 500 climbing almost 1% for its sixth straight gain, the longest streak since December. Ten-year Treasury yields were little changed after a four-week advance spurred by the unwinding of bets on outsized interest-rate reductions. In credit, the iShares iBoxx Investment Grade Corporate Bond ETF started the week with its best three-day advance since mid-September, while oil had its first weekly decline this month.
The simplest case for optimism remains the economy, where Jerome Powell’s Federal Reserve is undoing two years of restrictive policy as inflation subsides. Data this week showed both the US consumer and labor market are holding up, while bank executives issued almost unanimously positive outlooks as earnings broadly beat expectations. On Thursday, the Atlanta Fed’s GDPNow tracking estimate saw another upward revision, and is now forecasting third-quarter GDP at 3.4%.
To Philip Camporeale, a multi-asset portfolio manager at JPMorgan Asset Management, it’s almost as if the economic cycle is “ageing backwards and extending, because the Fed is easing policy with a very low probability of recession,” he said. “Macro volatility is lower today than it’s been over the last two years,” he added. Camporeale maintained the overweight in stocks relative to bonds he’s had all year and is adding riskier bets such as emerging markets equities.
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Of course, extending a rally that has seen the S&P 500 nearly double since the start of 2020 would be no mean feat, with the index trading at 24 times annual earnings, one of its higher multiples outside the 1990s technology bubble. Twice in the last three months, markets have been hammered by signs the US labour market is rolling over, only to reverse amid frantic dip-buying among retail and institutional investors.
Pinpointing where in its evolution the US economy sits is also a daunting task. While the S&P 500 suffered its worst annual drubbing since the 2008 financial crisis just two years ago, the selloff was premised on a recession that never materialized. Leave out the largely manufactured slowdown that accompanied the Covid-19 pandemic of 2020 and the last major disruption to US growth occurred more than a decade ago.
“People keep trying to apply this classic business cycle to this economy, but it’s just not working,” said Dario Perkins, managing director of global macro at GlobalData TS Lombard. “The best you can do is look for things that might potentially cause the cycle to end. And actually it’s not there. We’re actually in quite a good place.”
Perkins sees more room to expand, as central banks around the world continue to ease monetary policy. Traders dialled back bets on how aggressive the Fed will ease policy this year, but it didn’t stop the bullish flows this week. Some US$3.2 billion poured into a Bloomberg Intelligence basket of cross-asset “risk-on” ETFs, which include tech stocks and high yield bonds, the fastest pace since August.
Meanwhile, positioning in the S&P 500 is extended, with asset managers nearing record long on US stock futures. At the same time, a key metric of perceived riskiness in US investment-grade bonds is at its lowest level in about two decades.
Ayako Yoshioka of Wealth Enhancement Group is optimistic about the US economy after sizing up low unemployment and inflation near the Fed’s 2% target.
“The backdrop may not be perfect, especially because valuations are still elevated,” the portfolio manager who oversees more than US$6 billion said. “But it’s good enough.”
