25 Aug A NOMINAL EQUITY ADVANCE
There has been no shortage of hawkish Fed speak leading into tomorrow’s speech by FRB Chair Powell at the Jackson Hole symposium. As noted yesterday, the “transitory narrative” has been replaced by a constant flow of adamant statements the Fed will do whatever is necessary to squelch inflationary pressures.
At this juncture, the markets and the Fed are bifurcated. The Fed is making it “very clear” with its intents thus suggesting the tightening cycle is nowhere close to a conclusion. On the other hand, the markets believe the worst is behind us and the Fed may begin reducing rates in early 2023.
Millions can be potentially made or lost depending upon the ultimate outcome.
The value trade is again returning to favor. As with all asset classes and strategies, value went through an extended period of underperformance. The 2010s were not kind, especially from 2017 to 2020, but the 2020s are making up for some over the underperformance.
A popular explanation for value’s recovery are interest rates. Value stocks deliver cash flows in the immediate future, while growth stocks promise cashflows farther in the future. As rates rise, the present value of future cash flows is diminished relative to current cashflows.
Value is typically associated with the “hard economy” rather than intangibles such as algorithms and copyrights. The ratio of productive assets to current value is hovering around its lowest levels since Benjamin Graham wrote The Intelligent Investor according to the mega sized quant firm of AQR Capital Management. Accordingly, intangibles still comprise about 80% of the S & P 500 vale as compared to tangibles.
Introductory Finance states in an inflationary environment, hard assets outperform.
As noted the 2010s, especially 2017-2020, was not favorable to value investors, perhaps partially the result of benign inflation. Inflation began to emerge in late 2020 hence a possible explanation for value’s resurgence.
Wall Street is split whether value’s resurgence will continue. At the risk of sounding cynical, it is not what you write but rather why you write it. The ownership of companies labeled as growth far exceeds the ownership of companies regarded as value.
Commenting on yesterday’s market activity, equites were quietly volatile ending nominally higher. Treasuries sold off across the curve with some suggesting the President’s proposal to forgive $300 billion in student loan debt as the possible catalyst for by definition such is inflationary as it adds more to the national debt.
Last night the foreign markets were up. London was up 0.16%, Paris down 0.01% and Frankfurt up[ 0.25%.. China was up 0.97%, Japan up 0.58% and Hang Seng up 3.63%.
Futures are up about 0.25% as China’s massive stimulus steadied nerves ahead of tomorrow’s address by Powell. The 10-year is up 3/32 to yield 3.10%.