August 24 2023

The Mood is Frivolous

The BarbOppenheimer split finds a strange echo in the real world, where Zuck and Elon challenge themselves to a wrestling contest while geopolitics goes awry.

The downgrade of the US credit was seen as a non-event. Pundits brushed it off, dismissing it as the late outcome of debt-ceiling squabbles, and those were largely behind indeed. Nevertheless, this is still the manifestation of a relentless increase of the US debt burden, which was sent on a spin after 2008 GFC. If you read Neil Howe’s The Fourth Turning Is Here, the end of free money is probably a major ingredient in the last phase leading to a major crisis. But bear with me on this, we’ll come back to it in another post. I strongly suggest reading it in the meantime.

Manufacturing is at a standstill. YTD23, manufacturing added almost no jobs, while services kept powering ahead. This divide is most visible in China, where trade figures last week revealed a further slowdown in exports, dropping 14.5% year-on-year. To be fair, the depreciation of CNY against the USD played its role too, but something needs attention there, and the Chinese Government is on it. In the US too, manufacturing keeps sagging, as shown in the Empire State Manufacturing Survey this week.

On balance, US retail sales are still surprising on the upside, confirming sturdy consumer sentiment and business investments. On this positive backdrop, US rates stay high, with the 10-year at the highest level since 2007.

What does it mean for investments? July saw a massive bull market rally, not just quite burying the bears who re-surfaced in August. Overall, there is a sentiment of soft landing, pushing away recession fears for now. Market breadth is increasing, suggesting that investors gradually pivot outside tech leaders and into value names in other sectors. I would not go as far as going underweight large cap stocks. Leaders lead. That’s what they do.

Outside the US, EM assets remain a crying buy that no one wants to seize until major uncertainty remain on China, both on domestic growth, and its relationship vis-à-vis the US. I believe China stocks have bottomed out, but are painfully going sideways for now.

As we flagged earlier, rates remain high and likely coming down from 1Q24 in most scenario. This means that bonds should perform well during this period, notwithstanding that real yields – the difference between US 10-year and CPI – remain attractive. I’d be cautious on credit, as spreads in US high yield and Asia high yield could widen.

I get the call for flocking to private credit to get this “extra yield”. However, I’d be adamant to get into new vintage funds as opposed to old ones that could face uneasy restructuring.

Stay safe out there !

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360 Advisory LLC is a Boston-based RIA managing investments