Unhedged: the FT’s new email on markets and finance


Welcome. This is the first edition of Not covered, the new FT email that will arrive in inboxes every morning of the week. The subject is the markets, the people and businesses that make a living and dying of them. I hope to combine here analytical rigor and clear and unvarnished opinion, while having fun. Hope you will join me for the ride.

Register now here to receive the newsletter directly to your inbox. Tell your friends and email me if you think I’m a hero, an idiot, both, or neither: robert.armstrong@ft.com.

Wild week last week? Get used to

Last week was a doozy. The previous week lousy jobs report (cool economy, good for the markets as loose monetary policy is more likely) was a set-up for Wednesday’s breakout inflation report (hot, bad, tight). It then became the week we all have Concerned Even more on inflation.

Stocks, especially growth stocks, were trampled like a narcotics at a rally of bikers. The Nasdaq fell 5% between Monday morning and Thursday afternoon. Bond yields have increased. Then, on Friday, the fear subsided and things were almost back to normal. From my Reuters terminal:

Where does that leave us this week? Take a deep breath.

Markets like to overreact and it seems they overreacted to this inflation number. My former colleague Matt Klein, from Barron, made a simple argument for calming down. After that 60% of the increase in inflation over the previous month was from exactly the kinds of things you would expect to be transient: “used cars and trucks, hotels and motels, air fares, auto insurance, live events and museums; and food away from home. “

Yes, we need to keep a close watch on salary increases and other indicators of persistent inflation in the coming months. No, it’s not time to panic.

Bulls like this point. Here’s one, a private banking investment manager, like city by my colleague Katie Martin:

Bears are constantly on the lookout for signs of the end of the world. They find all the potential excuses. The reality is that the only question that matters is whether the reopening is going well or not. And it’s going well.

Bears are really stupid! (After all, for a decade they’ve failed to follow the simple investing rule you’ll ever need: if you see a US stock, buy it). Yet there are at least two reasons, other than the universally recognized stupidity of bears, why the market is leaping into the shadows. One is short term and the other is long.

The reason for the short term is that this market has quickly and aggressively dismissed the acceleration in economic growth that accompanies the reopening. But it will not take long to reduce the deceleration in growth. Here’s how Omar Aguilar, CIO of Multi-Asset Strategies at Schwab, told me:

We are experiencing the fastest cycle we have ever seen. . . markets were anticipating an unprecedented recovery and GDP growth last year. If we think the GDP deceleration is coming, the market will be ahead of that as well. I would expect to see a pullback when we hit the peak of growth – we’ll hit the peak of this cycle before we know it.

Aguilar believes that the growth peak could be in a few quarters. Others think it’s happening now. Here are Goldman’s economics team estimates for quarterly GDP growth (the graph is mine, in case you can’t tell):

My boss at the hedge fund I worked for liked to say: always watch the secondary derivative. It is more fun to be invested when growth is set to accelerate than when it is called upon to slow. Here’s what the excellent economist Don Rissmiller of Strategas emailed me about the upcoming GDP slowdown:

The second quarter is probably the peak of real GDP growth in the United States. . . It’s also possible that 1Q 2022 will see corporate and personal taxes rise, meaning there could be not only a slowdown, but a temporary slowdown in growth below the trend at the start of the new year. At a minimum, the risk increases as the year progresses due to the slowdown in the pace of vaccinations (leaving open the possibility of another seasonal health problem by the winter), the strong budget push passing, the possibility that the Fed will start the conversation about tax cuts and increases.

Does this make you nervous? Yeah me too.

Now for the long term. Here’s a chart that worked in the FT a few weeks ago, in a room by Karen Ward of JPMorgan:

Graph showing the forecast P / E ratios of the S&P 500 and subsequent 10-year returns.  Total annualized returns in percentage points, monthly data points from 1988.

The relationship between valuations and subsequent long-term returns is imperfect, but it is as strong as any predictive relationship in the markets. If we know anything at all, we know that when you buy the market when it’s very expensive, you won’t make a lot of money in the long run. And where the valuations are right now, history tells us that the money we invest today will earn, oh, nothing, give or take a few percentage points, every year for the next 10 years.

Reviews are useless, or worse, in telling you when to sell. If you sell and miss the euphoric moments at the end of a bull market, you are almost certain to underperform over time. There is no good reason why we can’t have a face-melting rally tomorrow.

But knowing that you need to own stocks for the short term and that you cannot reasonably expect good returns over the long term is a formula for investors. Get used to weeks like last week. It’s gonna be weird a few years.

A good read

I have just finished Noise, the new book by Daniel Kahneman, Olivier Sibony and Cass Sunstein. It’s not such a great book as the imposing Kahneman Think, fast and slow, but that makes a very important point. Dispersed random errors (noise) in our judgments are at least as damaging and common as the predictable and non-random errors (bias) they contain. Thanks in large part to Kahneman, savvy investors are constantly thinking about bias and how to eliminate it. They should also be thinking about noise.

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