There is an old street adage that says “Sell In May And Go Away... “. We note, however, that with the advent of the Internet Age following this rule-of-thumb would have been costly in the last few years. Conversely, last March was painful for most investors as is this month of March. Whilst we struggle to explain the basis for the generic May adage, we have explanations for the last two ‘month of March’ washouts. Last year can be attributed to the flare-up of COVID-19 and this one might be attributed to the rising of longer-dated interest rates, the strengthening of the US$, further COVID lockdowns in Europe, a blow-up of a large hedge fund or family office and the resulting mayhem of margin calls with their fire-sale liquidations.
No, it is not yet time to coin a new adage for March... Whilst we have been wrong footed with this rather brutal fall of equities, we think the current situation is likely to present a good base for replicating the reaction we saw last April. A huge and long-lasting rally across much of the equity markets. Let’s see why this may well be a reasonable view:
- Yes, the benchmark Ten-year Treasury Notes yield has crept-up another notch to 1.77%. The Federal Reserve has assured us that the short rates are anchored for at least another couple of years. A steeper yield curve is normally a predicter of stronger economics ahead! Colin Powell predicts a 4 to 5% GDP growth ahead. Better growth drives equities.
- Is inflation coming back? We join the world’s Central Bakers in hoping for some price increases to return, but we doubt this is in the cards for the foreseeable future. Price discovery mechanisms are set in place by the Internet, now spreading inexorably into services. The middleman is dead, a cost of intermediation is being removed and prices therefore will continue to decline.
- The US$ is moving... DXY is now over 93.13 up from 89.5 at the start of the year. Is this in response to rising rates? Probably not, as FX trading rests on short term interest-rate differentials and these are anchored. Is it perhaps not a rise of the Dollar, just a drop in all others?
- Commodities which are mostly priced in US$ are rising even as the US$ is gaining. Oil, copper, and many other basics are rising. A real return of demand? Maybe Powell is right in predicting strong GDP growth ahead?
- It appears that the production, distribution, and application of COVID vaccinations are all progressing. The world may be approaching the hoped-for moment of stabilisation and reversal of the pandemic. Possibly explosive demand on a closer horizon than previously expected.
- President Biden announced that Multi-trillion Dollar Infrastructure plan is coming... likely $3T to $4T... This is huge amount of dosh. For context, the US GDP was in 2019 circa $21.5Tn. What should an investor do now to benefit from all this impending cash infusion to the US economy? Try to identify the businesses that may get a slice of this budget? There is talk of renewables like wind farms, rebuilding of bridges and highways, Internet and other communications systems? Or should we use the macro thought of all boats rising with the tide? We advocate the latter, as money flows in ways which are hard to predict... We just know that money is a coming... Be invested in stocks, preferably US based.
Yes, it remains our mantra - Away from bonds of all types as they offer little reward for any unit of risk taken, stay in equities. No assurances, but the best odds for finding capital appreciation. Just do tighten your seat belt, as the ride might be choppy... The Hedge-fund blow-up last Friday on margin calls gave us a whiff of the 1998 Long-Term Capital blow-up which dragged down the financial system. It may be a canary in the equity-mines as hedge funds are stretching to find returns and justify their existence. To paraphrase, if it can blow-up, it will. Stay long, hold on tight and you are likely to be well rewarded. “If you get up in the morning and think the future is going to be better, it is a bright day. Otherwise, it's not.” Elon Musk.