With Labor Day fast approaching, and kids back to school, eyes turn to what happens when everyone is back in front of their screens. Or their investment and risk committees. And what will the question be? There will be two, interconnected questions: Can the rally into risky assets sustain itself? When will the Fed next hike rates?
Given that Blondemoney suspects the Fed is about to tear up the rule book at Jackson Hole this weekend, these questions are kind of irrelevant. The point is that even if the Fed are hiking soon, there’s not much to come afterwards. Equally, monetary policy is a busted flush and the baton falls to fiscal. (Note that the FT yesterday turned its op-ed over to a multi-asset fund manager, Euan Munro, arguing for fiscal stimulus to revive the economy).
So the question instead should be, when will the driver of asset prices shift? Or at least when will perceptions of what the driver is, shift?
If we are about to enter a vacuum, between monetary and fiscal policy, then the market could go two ways:
1) Risky asset correction, as confusion reigns
Without monetary policy as the trigger, and with fiscal policy a process that takes time to implement let alone demonstrate impact, confusion could fill the vacuum. If the world ahead looks completely uncertain, cut half your positions, go defensive, and come back later when it’s clearer.
2) Risky assets continue, with no catalyst to change the outlook
Yes it could be the return of Sid James, as we Carry On Carrying, safe in the knowledge that monetary policy is now completely predictable, and fiscal policy, while unclear, would only be used to restore growth and inflation.
Blondemoney is no scientist, as is abundantly obvious, but the 2nd route is the Newton’s First Law of markets.
‘an object in motion stays in motion with the same speed and in the same direction unless acted upon by an unbalanced force.’
So, if you’ve got cash to put to work, then do so, and keep doing so, unless you hear anything different.
Of course, there are plenty of risk events on the horizon that could provide fresh information – but most of them are political, which (as BM readers know) is difficult for the market to price. A Trump Presidency; a new Italian PM after the constitutional referendum; a polarised French Presidential election; a breakdown of Russia/Turkey/US/EU geopolitical relations.
As the WSJ pointed out, the S&P 500 has never moved so little in a 30 day period. Usually we feel markets then become uber complacent, ready for the pullback. But what if that pullback is met by Newton’s First Law of Carry Trade Lovers… if it’s not volatile enough, then it doesn’t force that world to retract, it forces them to get back in, more, and quickly.
Irrational exuberance it may look to some; but with interest rates negative and the future still too far away, why not get stuck into some serious carry? Does a Fed rate hike in Sept or Dec stop that, if they’re about to announce they’re not doing many more than that?