This article was last updated on May 23, 2023
Momentum Flabby, Initial Stress in Banks, Concept and SPACs
Momentum Flabby, Initial Stress in Banks, Concept and SPACs. For individuals and institutions alike, both policy change and elevated valuation are likely drivers in euphoria laggardly morphing into flabby momentum,. Quantitative ease model dominance and even of high frequency trading is now likely giving way to better balance with behavioral finance and the even more classical political economy considerations.
Myriad policy aspects seemed ignored during massive quantitative ease. The apex of “strongman politics” likely occurred just ahead of the invasion of Ukraine and just as defense allocations were bottoming, now requiring expansion. Augmented by rising administered rates, more difficult decisions lie ahead in “guns versus butter” choices in fiscal public budgeting. Equally pressing appear corporate choices favoring infrastructure efficiency investment versus the erstwhile tilts of equity buybacks.
Contrary to expectations of early monetary ease, financial reset appears incomplete. On inflation. central banks gleaned from the 1970s/early 1980s that being steadfast was superior to being mocked due to procrastination. Steadfastness is currently called for. The 1990s/early 2000s financial supervision lessons were applied mainly to systemically important financial institutions (SIFI) liquidity and leverage. In 2023, from Europe and the U. S. have come finance supervisory lessons that asset liquidity mismatch and leverage risk have a newer gearing of new technology facilitating instantaneous, massive transfer of deposits that pose systemic pressures from both smaller banks and Non-Bank Financial Institutions (NBFI).
Despite fixed income interest rate differentials, major currencies have been relatively stable and arguably for portfolio diversification preferences while U.S. debt talks flare. In May 2023, the ECB, the Bank of England and other rate increases joined the Federal Reserve which raised Fed Funds to 5.25%, from whom we expect another 75 basis points over 2024 to a plateau of 6%. Of the G-7, Japan remains minimalist. The Bank of Canada has twice consecutively eschewed rate increases, also risks currency depreciation. An election year 2024 is likely to give rise to trade friction from U.S. interests. The interest rate/ exchange rate nexus is likely to become more volatile
Since the S&P 500 peak of 4797 on December 23,2021, equities have been flabby and laggardly evolving in sector rotation and geographically (for example between the U.S. and Europe). Momentum has periodically flared. At alternate times, so have defensive slants. Even in the higher credit tranches, capital budgeting scrutiny deserves attention as regional banks and less diversified companies are already discovering. Elevated input cost inflation and higher labor demands mark the potential for lower operating margins. Merely meeting oft reduced estimates is likely to be insufficient while P/E ratios have contraction risk.
Quality of operating delivery, more conservative capital tiering and sharper capital budgeting are likely to be preferences well into 2024. Cryptocurrency and private equity (as well as SPACs) have also appeared as harbingers of stress. Long run political economy and short term policy responses are likely to favor defense security, industrial, materials, energy and tangible product information technology as counterpoint in equities to the prior dominance by concept and consumer ones. Finance from banking onwards is likely in severe restructuring favoring the ruthless. In asset mix, alongside short duration, we would have exposure to precious metals.