Wednesday, May 1, 2019

April Returns - Rotation back to risky assets


"Who’s gonna tell you when it’s too late
Who’s gonna tell you things aren’t so great" 

Drive (The Cars)

In March there was rotation from equities to bonds as investors grew cautious about growth and believed that equity returns may have gotten ahead of earnings. These musings were appropriate given soft survey and hard data releases both continuing their decline and economic growth trends pointed lower. There was a divergence between equity and bond returns and it looked like the fixed income guys had a better grip on reality. 

April showed a move bak to the positive equity trends across geographical areas, size, and styles. Any equity sale was premature, yet less bad news is not good news. Perhaps some of the slowing data were moderated, but an extrapolation of equities (SPY) beyond 18 percent is aggressive. Further gains at the current pace is out the norm on an unconditional basis and is less likely on a conditional basis if growth and inflation stay in the modest range. First quarter GDP was a surprise at 3.2%, but the drivers were inventory build, higher net exports, and government expenditures. These are not the drivers for a continued surge in growth. 

Nevertheless, the current economic environment seems to have the same appeal as watching paint dry; a 2 percent growth range, contained inflation below 2 percent, a Fed that is on hold, a global economy that is also rangebound, trade war negotiations that have ground to a stalemate, and volatility that will leave investors complacent.

It is hard for any investor to currently make portfolio changes, yet it all the more important to look for adjustment signs. Yet, who is going to tell you when it is too late or tell you things are not so great? 

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