Macro Articles

It’s fair to say the S&P 500 has led global markets up a wall of worry over the past couple of years. But the S&P 500’s gradual grind higher evolved into full on market euphoria when Trump won the US election so convincingly. We all know that market euphoria tends to end in tears. The dot-com bubble was a memorable example. With those memories in mind, it’s worth asking the question: are US/global markets too bullish?

Trump talked a big game on tariffs during his journey back to the White House. ‘If I’m going to be president of this country, I’m going to put a 100, 200, 2,000 per cent tariff,’ on cars from Mexico he forewarned. He went so far as to describe tariffs ‘as the most beautiful word in the dictionary.’ Investors should prepare for two uglier words...

With the S&P 500 rallying an historic 40% over the past twelve months, you’d be forgiven for thinking all is well with the US Government’s finances. After all, the state of the world’s largest economy is inextricably connected with the US Treasury’s financial health. Sorry to shatter that illusion, but the truth is very different. Do not read what follows if you prefer to believe in the US fairy tale…

Blackrock’s Q4 equity outlook report contains some useful intel to help investors make sense of global markets at this juncture. With the US election looming and the Fed’s initiation of a rate cutting cycle, there’s a lot for markets to worry about and celebrate. One thing’s for sure: it’s unlikely to be a boring end to the year.

You may remember when the yen carry trade revealed itself as the catalyst for August’s sharp selloff across global markets. The knock-on effects of its unwinding surprised more than a handful of investors at the time. The sobering news is that the yen carry trade continues to linger and is arguably the market’s biggest risk right now. It may well be prudent for investors to prepare for a repeat of August’s volatility.

It’s not often that the Fed cuts rates by 50 basis points in one move. It surely indicates the Fed is worried about the state of the world’s largest economy. If that’s the case, global investors, including in Australia, should sit up and take note. The key question at this juncture is: does the Fed’s urgent action indicate a US recession is looming?

Remember how you felt about yield when interest rates were at historic lows? In those days when yield was scarce, investors placed a higher value on it, and it was of greater importance to investment valuations. Then everything changed when the developed world’s central bankers raised rates at the fastest pace in history. Yield suddenly became more abundant, and the market took some time to adapt to this altered market environment. In short, it was bad news for yield-focused investors who had to watch their capital values fall as yields rose.

It’s been a wild ride for investors of late with volatility returning to global markets catalysed by the unwinding of the Yen carry trade. Whilst intermittent volatility shouldn’t surprise anyone, it has surprised the investors who’d grown to believe that equity markets gradually increase in value forever. What investors do next will arguably define whether 2024 is a good or a bad year for their portfolios…

Global markets have long been fixated on what’s coming next from the world’s central bankers, particularly the Fed. But some investors may be unaware of a central bank strategy would could change the rules of the investing game if the Fed were to use it.

It’s been a wild ride in recent months for Fed rate expectations. Back in January this year, a buoyant US market expected seven Fed rate cuts by the end of 2024. By March, the market had sobered up a little and expectations had fallen to three rate cuts for the year. But now markets are only expecting one Fed rate cut in 2024. Interestingly, despite pricing out a full six rate cuts since the start of the year, the S&P 500 is up 15% year to date.

The war in Ukraine signalled a step-change in global geopolitical risk which was further escalated by events in the Gaza Strip. Whilst the investment world remains hopeful (and possibly correct) that global peace will resume after these events, history is less comforting. The risk of a third world war has rarely been higher, and investors have rarely been less prepared for it. Being ready for the unthinkable may be more prudent than you currently believe.

We’re entering unchartered territory with the current global bond bear market both in terms of duration and magnitude. For an asset class which had previously been incorporated into the vast majority of portfolios primarily for its defensive attributes, this bear market has raised serious questions about how investors should view bonds looking forward.