Three Feathers for Leadership and Market Rotation

With markets at the cusp of the last month of the fourth quarter of a tumultuous year and decade, we consider the three feathers for leadership, well beyond fairy tales. In our view, the three feathers for leadership of the capital markets are fiscal policy and the domain of nations, monetary policy and the domain of central banks as well as capital market valuation and the domain of corporate delivery. We see the first feather of fiscal policy as considerably complex beyond looking at unemployment as lagging indicator and more related to a frugal consumer at variance from prior cycles, shorter political honeymoons for governments and international discord risk. On the second feather of monetary policy, central banks precipitously shifted from long term objectives to shoring up credit. In a charged environment, not least for self preservation, central banks need to be more forthcoming.

Governments and financial institutions have felt ire. Central banks appear reticent about even decade old policy shortcomings with the risk being markets stretching policy bifurcation on the visibility of exit strategy planning, for instance. Quickly, capital markets have gone from negligible risk premiums in failure on diversifying away systemic credit risk to credit crunch with massive risk premiums and to now risk premiums large only against unusually low government bond yields, indicating potential risk from a new variant of decoupling. Looking forward with respect to investments, the third feather of corporate quality of delivery is likely to be higher in importance. There have been significant developments but not enough for us to shift from favoring bifurcation and quality of delivery through this cycle. Uncertainties appear still present that imply volatility into quarter end. On sectors, we see financials as crucial to market performance but favor the strong with globally, massive expansion in individual new equity issuance.

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