Vladimir Ilyich Lenin, the leader of the Russian Revolution and the first head of the Soviet state, once said. “There are decades where nothing happens; and there are weeks where decades happen.”
Are we witnessing one such week now?
Please find enclosed our newsletter for April 2024.
Please find enclosed our newsletter for March 2024.
A slew of strong macroeconomic data – from GDP to employment to consumption – has given comfort to financial markets. At the same time, the immense possibilities of AI have propelled optimism in that sector to stratospheric highs. Despite this, many professional investors are wary, and watching out for ‘black swans’. On the other side of the globe, some interesting and potentially far-reaching changes are taking place.
Our newsletter this month examines some of these issues.
In 2023, US financial markets defied widespread expectations of an economic slowdown to generate one of the best performances in history. Looking ahead, projections seem a bit more evenly balanced, though the tilt is towards a ‘soft landing’. We look back at history, and examine the implications of the facts deviating from this dominant narrative.
As we had predicted in our newsletter last year, financial markets did not conform to the dominant narrative at the time.
Neither the trajectory of US interest rates, nor the reopening of the Chinese economy – both of which were expected to drive markets – played out as expected.
We are pleased that we at Asas Capital were able to keep our clients fairly insulated from the disappointment while still ensuring they earned attractive risk-adjusted returns.
Thank you for all your support, and best wishes to you all for 2024.
Things are unravelling pretty fast for the United States. Its national debt continues to balloon. It’s deficit continues to widen, and is expected to keep doing so for the next decade. Its politicians can’t seem to agree on anything and keep playing ‘extend and pretend’. Its attempts to bring manufacturing back home in an economically sustainable form are being challenged by unionised workers demanding better terms.
It seems to be betting that its dominance in new technologies including AI will allow it to bypass many of these challenges and usher in a new era of economic growth.
But will it?
The conflict in the Middle East is overshadowing other market news for now. This ‘risk-off’ sentiment is likely to continue until one of two things happen. Either the conflict comes to a close, one way or another. Or it continues to simmer for an extended period, and the market adjusts and starts making better informed decisions about the implications.
The sentiment in markets is one of fear and uncertainty.
On the one hand is the worry that the Israel-Hamas war will metastasize into a wider conflict. On the other is the stated commitment by the FOMC to continue with a high interest rate regime despite the relentless rise in long-term yields, and the impact of this on the economy.
Given the relatively conservative positioning by investors, a short-term rally cannot be ruled out once the market starts to adjust to the reality of the war. Since risks remain elevated, we feel the best way to play this would be using options.
Market sentiment has become extremely bearish.
The S&P 500 has broken through support at 200 DMA, CNN’s Fear and Greed Index is in “Extreme Fear” territory and strong earnings report by most of the “Magnificent Seven” stocks have been glossed over.
Uncertainty around the direction of the conflict in Israel will likely keep markets nervous for now.
Markets had a rellef rally last week. As we mentioned a couple of weeks ago, the technicals were oversold, and looking for a positive trigger to go up. That trigger came this week with the FOMC decision to hold interest rates at current levels, as well as softish data on jobs and inflation. If the markets are able to push through key levels over the next few days, then the move could go higher into the year-end. Of course, the Hamas-Israel conflict is likely to cast a shadow depending on how it progresses.
