For almost nine months, an historic Fed liquidity flood has washed away any economic, valuation, technical, or “sentimental” stock market challenges. Nonetheless, each economic disappointment brings hope this flood will intensify. Those hopes aren’t irrational, because when it comes to any measure of liquidity, rate of change is more important than level.
The bullish consensus seems to be that unlimited Fed liquidity will lift all stock market and economic boats. However, past liquidity floods have tended to lift boats that were already the most buoyant. The “Y2K Liquidity Facility” and last fall’s emergency Fed intervention in the overnight repo market are two cases in which liquidity seemed to flow to where it was needed the least.
March’s mad dash for cash didn’t stop with rates/credit/FX markets. Among equities, there was also a strong preference for cash liquidity. The market rewarded companies that had strong cash positions and punished those without—which explains why traditionally defensive styles actually underperformed.
Based largely on the bearish trends in our monetary and liquidity measures, we were correctly negative on stocks throughout most of 2018. It’s therefore especially painful for us that 2019’s market rebound has been credited almost entirely to the “pivot” in most of those measures.
Whatever one’s preferred leftovers from yesterday’s feast, the odds are good you’ll find them more appetizing than the slop served up by global asset markets this year. Stocks have obviously been turkeys, but all the surrounding trimmings that help diversify a portfolio have proven anything but complementary to the main course.
Extreme market viewpoints get the headlines, but it’s baked into our disciplines that we will (occasionally) be noncommittal.