I haven’t been posting frequently lately partly because there haven’t been a lot of comments and frankly, not that much to comment about. For all the media sound and fury, markets strike me as having become oppressively boring. So far this month for instance, in dollar terms, stocks have sold off, but so have gold and treasuries. Relative movement has been conspicuous for its weakness. Since October market “upside” has mostly been about the dollar depreciating, or what I call the Titanic Effect … akin to standing aboard the deck of the Titanic and remarking on how the ocean is rising. So while our relative underweight of stocks versus overweight gold and bonds hasn’t hurt so far, it hasn’t helped either.
Waiting for Godot is neither profitable nor fun, but I can’t get past the inversion of the yield curve. The 10-1 year yield spread went negative on July 12 of last year and hasn’t looked back since. The inversion is profound, not only deep but broad, affecting most of the curve, with three month yields well above thirty year yields. Yield curve inversions are some of the most certain predictors of the kind of stock underperformance we’ve been looking for, but can be a bit tricky on timing, with typically 6-24 months lag, and yield curves have often uninverted first anyway. For example by the time of the 2020 stock market crash, the inversion of 2019 had been all but forgotten in the media. In addition to many other factors, however, SS is well aware of this and nevertheless targeted a turning point last quarter.
We’ve seen blips and stretches of this expected relative performance but so far they have generally been offset by blips and stretches of the opposite. Aside from the advance notice given by the YC & SS, such turning points typically come with little warning, can happen fast, and can be hard to distinguish from minor, soon-to-be-reversed excursions before they’re well advanced. Not being fond of living on the edge of my seat, I prefer to maintain the stock:gold&treasuries under:over-weight. When its time to shine comes, it will be hard to miss.
We fortunately haven’t had to exercise Vladimir and Estragon patience with our call for foreign stocks to outperform the US. From then to today’s close, in dollar terms, the world-ex-US index fund VXUS is up 22.1% versus the US index fund VTI at 15.2%. On an annualized basis this outperformance is nearly 20%. Our exit from cash USD has worked out well too.
In today’s news, New York Fed President John Williams said that “we need to retain a sufficiently restrictive stance of policy; we’re going to need to maintain that for a few years”. While Fed speakers in general have been clear that they intend to maintain restrictive rates for some time, this is the first I recall a phrase like “a few years”. Williams is seen here with Fed Vice Chair Lael Brainard and Fed Chair Jerome Powell.
The Fed Power Triumvirate