Over the past few months we have been sharing our thoughts on macroeconomic trends that may impact our thoughts on stocks, segments of the market and the overall attractiveness of the market. Last month we covered how the market reacts following crisis events and trends in US Treasury yields and dividend yields.
This month we will cover the following topics:
- The Oil Market
- The Quality Asset
Some believe that the airline industry has entered a new age, an era of viable and sustainable returns on equity. Maybe.
A few years of average profitability might not yet constitute a safe entry point for purchases in an industry that has not only been unprofitable, but even unprofitable in a wildly volatile fashion. The airlines have not shown an ability to consistently service their debt, let alone deliver a consistent stream of earnings to their owners.
Until the returns improve, and the variability of these returns drops, investors may find other opportunities throughout the world, more attractive.
The Oil Market
Dropping over 20% in the past month, oil is now unchanged on the year. Other than the direct implications for the oil industry, what signals might we be observing?
Source: Wall Street Journal
One important signal might be the inflation narrative, being used in part to justify the Federal Reserves trajectory for short term rates, has been undermined. Softening global equity markets, and declining commodity prices, do not portend an economy anticipating inflation.
The Quality Asset
What is the quality asset? The quality asset, historically, has been the asset that is purchased, when all other assets are being sold, the asset known as “the flight to quality asset.” For much of recent history, gold has been such an asset, though the price action in recent years puts to fail this notion.
Perhaps gold is just to small a market to effectively absorb large capital flows. The entire gold holdings of the European Central Bank have only little more value than a single month’s purchase of securities under quantitative easing.
The United States Treasury market, the biggest and most liquid market in the world, has in recent years, acted as the flight to quality asset. The price action this year does not support the thesis that US Treasuries, wherever located on the maturity spectrum, are the negative beta flight to quality asset where all money flees when risk assets are sold. Risk parity funds were designed to hold leveraged treasuries and other securities, such as gold, that would go up when all other assets were sold. The strategy is not working.
Source: Wall Street Journal
The United States equity market, one of the few markets of any kind throughout the world that is higher in 2018, is acting much like the flight to quality asset.
To review previous market perspectives, click the following links: