Ayer severo correctivo de Wall
Street, el que se venía esperando y no llegaba… Ha sido el Nasdaq con una
fuerte bajada el que ha tumbado todo. No era para menos dado lo que tanto había
subido en los últimos años.
Y como siempre, un efecto
contagio amplio en el resto de las bolsas y subida del índice de volatilidad.
Es lo suyo en las bolsas, los
pasos atrás. Mira las correcciones que ha habido en los últimos años y que
luego quedaron en agua de borrajas:
Ha coincidido con nuevas
tensiones en los mercados de bonos:
Que provocan peores
valoraciones en las acciones…
¿Es una mera corrección o es un
cambio de tendencia?
The S&P 500 has lost about 5% since
last month's record high, but it's still up about 4% year to date. It's
painful, but still short of a typical correction (-10%). The culprit? News
reports cite the 80 bps rise in 10-yr bond yields this year, Fed tightening,
rising tariffs, and the flatter yield curve.
I don't buy most of that. Bond yields are
still unusually low, and the driver of higher yields is rising real yields,
which reflect a stronger economy; why should a stronger economy be bad for stocks?
The Fed hasn't even begun to tighten, since the real Fed funds rate is only
slightly above zero; short-term borrowing costs are almost free. The yield
curve has flattened, but it is still positively sloped; the all-important real
yield curve is still nicely positive—no implied threat there. Rising tariffs
are a genuine problem, to be sure, but that's still in the nature of a headwind
rather than impending doom. Tariffs can be dismantled as fast as they are
applied, and Trump has made good—if hardly perfect—progress bringing down
tariffs with Canada, Mexico, and the Eurozone. China is the main problem, and
it boils down to a big game of tariff chicken. It's in no one's interest to
escalate this conflict to outright tariff wars. I remain confident that the
future of global trade will be "freer and fairer." The truth about
tariffs is that a) they mainly hurt the country that applies them, and b) lower
tariffs are always better for all concerned. I'm not ready to bet that Trump
and China will refuse to come to an agreement that would be mutually
beneficial.
Right now, my best guess is that this is
just another panic attack, of which we've had quite a few in recent years.
They've all been resolved eventually, as the stock market manages to climb
successive walls of worry. This is healthy. It wouldn't be surprising to see
prices decline further, but it would be surprising if this proved to be the
beginning of a major rout or recession.
Here are some up-to-date charts that focus
on key indicators:
Chart
#1
The Vix index is the classic measure of
investor's fears; the higher it is the more it costs to buy the protection of
options. I like to divide it by the 10-yr Treasury yield, since that is a proxy
for the market's growth expectations; the higher the yield, the stronger the
economy, and vice versa. The ratio of the two is thus a measure of how fearful
and doubtful the market is about the future. It jumped today, but as Chart #1
shows, it is a minor blip from an historical perspective. Note how jumps in the
Vix/10-yr ratio always coincide with big drops in equity prices.
Chart
#2
Chart #2 shows 2-yr swap spreads in the US
and Eurozone. Swap spreads are an absolutely key measure of market liquidity
and systemic risk (the lower the better). Swap spreads also have proven to be
excellent leading and coincident indicators of financial market and economic
health. Conditions in the Eurozone aren't quite as good as they are here, but
conditions in the US are about as good as they get. There is plenty of
liquidity, which is essential to ensure orderly markets. With plentiful
liquidity, the market can price in and deal with all sorts of problems.
Problems arise when liquidity is scarce and markets are thus unable to perform
one of their key functions, which is to distribute risk from those who don't
want it to those who do. This chart is also prima facie evidence
that the Fed is NOT tightening monetary policy.
Chart
#3
Chart #3 compares the prices of gold and
5-yr TIPS (using the inverse of their real yield as a proxy for their price).
It's remarkable that the prices of these two distinct assets should tend to
move together. Both have been in a gentle downtrend for the past several years.
I've interpreted that to mean that market is gradually losing the risk aversion
that peaked about six years ago. Confidence is replacing risk aversion, and
with rising confidence comes less demand for the safety of gold and TIPS. This is
healthy.
Chart
#4
Chart #4 shows a popular measure of the
dollar's value against other major currencies. By this measure, the dollar has
been roughly flat for almost four years. Problems usually arise when the dollar
experiences big moves up or down, since that can and often does reflect big
changes in monetary policy (tight money tends to strengthen the dollar, and
vice versa). This is a good indicator that US monetary policy is not causing
significant problems for the rest of the world.
Chart
#5
Chart #5 shows the real and nominal yield
on 5-yr Treasuries (blue and red lines) and the difference between the two
(green line), which is the market's average expected rate of inflation over the
next 5 years. Note that inflation expectations have been relatively stable
around 2% for quite some time, and especially over the past several months.
This means that nominal and real yields are rising and falling by about the
same amount, which further means that what is driving the ups and downs in
interest rates is changes in real yields. As I've noted many times before, real
yields have a strong tendency to follow the real growth trend of the economy.
Real and nominal yields are up because the bond market is becoming more
optimistic about the health of the economy. Nothing at all wrong with that!
Chart
#6
Chart #6 compares the real yield on 5-yr
TIPS (inflation-protected securities) with the real Fed funds rate, which I
calculate by subtracting the year over year change in the core PCE deflator
from the nominal Fed funds rate. The real funds rate is the best measure of how
"tight" or "easy" monetary policy is. What this chart shows
us is that over the past few years the Fed has moved from being very
accommodative to now roughly neutral. This is not threatening, especially considering
the improving health of the economy. In truth, what would be very worrisome
would be if the Fed had NOT raised rates, since that would have given us a
weaker dollar and rising inflation.
Chart
#7
Chart
#8
Chart #8 shows Credit Default Swap Spreads
for investment grade and high-yield corporate debt. These are highly liquid and
reliable indicators of how concerned the market is about future corporate
profits (the lower the better). While spreads have increased a bit of late,
this is a mere blip from an historical perspective. Credit spreads are still
relatively low, which is another sign that the market is not very worried about
the health of the economy.
We likely will learn more about what
sparked the current panic attack in the fullness of time. But for now, it looks
to me like it's just another one of those unpredictable—and
disconcerting—reversals that occur from time to time. Market are like that.
Things should get back on track eventually, because there is no sign as of now
of any serious deterioration in the market or economic fundamentals.
Abrazos,
PD1: La única duda es que las
posiciones especulativas son muy elevadas, el crédito al mercado es demasiado
abundante, y esto originará más papel…
PD2: La conversión consiste en
que el amor supere progresivamente al egoísmo en nuestra vida, lo cual es un
trabajo siempre inacabado…
