The 10-year yield made a new cycle high just before the Jackson Hole meeting. That is significant, as it not only broke the lower-high-lower-low pattern since last October, but also rejected the hypothesis, “we have seen the cycle high in interest rates,” which was the consensus at the start of 2023.
After years of wandering in the wilderness, Japanese stocks are leading the world’s developed markets higher in what has been a robust opening half of the year. The table shows Japan leading the world’s ten largest developed markets (as measured by the MSCI family of international indexes) with a 24% local currency return through June, easily outpacing the pack. Even as the MSCI USA index gained 17% by successfully “fighting the Fed” this year, Japan surged another 7% beyond that outstanding result. We were curious to understand the nature of Japan’s spectacular run in 2023, looking to identify the drivers of this strong and relatively quick jump higher.
More upside surprises are still likely and, despite the disappointing jobs report, the overall economic picture still supports a September taper. The improving economic picture is not just happening within the U.S., but in other major countries. We still believe the upside for the U.S. 10-year is limited.
Notwithstanding the market action in the most recent month, in the longer term we suspect that the Japanese stock market might be less vulnerable than other regions and countries of the world (including the U.S.).
One of the great bubbles of all time continues to deflate. The Japanese stock market, as measured by the Nikkei Index is now down 53% from its December 1989 peaks. The P/E for the Nikkei has fallen from its 1987 peak of 68 to its current level of 30 (trailing 12 month earnings), a decline of 56%.
here is a lot to write about this issue, including a number of equity portfolio changes and shifting sector strategies. But this publication must also uphold a cherished February tradition.
Well, I have to admit it, this writer counts himself as one of the befuddled. Based on the calls in late June, a number of clients are also in the peer group. So, in terms of the shorter-term market outlook, I’m afraid it is a case of the befuddled leading the befuddled...or not leading the befuddled?