Stemming from the virtual absence of underwhelming
economic data… the cumulative weight of growing confidence – as relative as it
may be, continues to list US markets towards what we suspect will become
another surprise “Come about!” in investors optimistic expectations towards the
US economy. How much water markets may take on – or whether it becomes a capsizing
Minsky moment, is another question entirely. Considering the Trump cards that could be played along
the spectrum of possible outcomes (both bullish and bearish), the gap between risk and reward for nearly
every type and duration of investment strategy remains profoundly wide. That being said, we remain largely risk adverse until there's
greater clarity on monetary or fiscal policy, and still favor the short side of
the dollar and the more safe haven positions in precious metals and long-term Treasuries, as we suspect the long run of "not bad" to mediocre grades comes to pass. The economy is surely not failing, but don't kid yourself
What’s not
in question – and which we take our bearings from, is that equities, yields and
the US dollar have trended with investors relative expectations with the data,
well before the outcome of the US election even came into focus. Looking back,
this has increasingly been the case since the Fed left ZIRP in December 2015;
with the most recent updraft beginning last summer after investors immediate fears
with the Brexit vote went largely unfounded in the markets. And while animal
spirits and narratives were certainly rekindled and reframed after the
election, a positive reversion was already underway for months with respect
towards participants respective expectations within the economy. Vacillating between poles of optimism and
pessimism – as the index measures levels relative to consensus, we would
speculate that the Citigroup US economic surprise index now reflects that
expectations have largely caught up with the data, with a much greater probability
that subsequent “surprises” will trend towards the negative pole.
Moreover –
and as recently described by Matthew Boesler of Bloomberg (see Here), there has been a growing
gap between business and consumer confidence surveys and actual economic
activity. The difference between these so called “soft” and “hard” data series
has only been wider once before in 17 years of data, in February 2011. It seems
reasonable to believe that the gap reflects the sharp shift in business and
consumer sentiment that took place after the Republicans ran the table in
November. The abstract concern being – hope springs eternal, or until reality
bites. To that end, we’re more inclined to focus on the US macro environment
beforehand that was predominantly characterized by lackluster year-over-year
growth that was treading water at best – or decelerating from a cyclical high in a historically mature economic expansion at or near full employment.
