Tony Thoughts (about the market) 05/11/23
Biweekly thoughts on US+Brazil macro scenario/positioning/risk
I am marginally more optimistic on the US macro scenario. I think the incoming US data (NFP, CPI etc) support positive narratives: NFP: still strong labor market, no recession near term…CPI: number strong but slowing on a YOY basis and more concentrated (core →used cars)…banking crisis: no “sudden stop”, just enough to keep the Fed sidelined and some healthy slowing in demand through the credit channel.
Of course, these narratives are not internally consistent, they all are the “half glass full” variety; but one of the things that I think has been true in this weird equity bear market is that the market has always done its best to see the glass half full. And my reading of the sentiment/positing data is that there is still enough bearishness in sentiment that the marginal pain trade is higher. But since a recession (which I still think will come, just in time to hurt Biden!) is not a near term risk, the inconsistency can hold.
That said, current levels aren’t great…can we really break 425 on SPY? Can TLT break 109? Is the narrow leadership in FANG+ a good thing? (contrarian indicator for the rest of the SP…as macro improves lots of other cheap things to buy) or a bad thing? (people are hiding in “quality growth”, bear market won’t end until that pukes out). I think the macro data will determine which version ends up being “right”.
Given that we have gone through the major risk events (Fed, NFP, CPI, earnings season) and we have NOT broken higher through well advertised resistance levels, I think we will meander in a farily boring, but technically disciplined, range trade at the index level. Vix at 17 or so does not look wrong.
Portfolio 1/3 mix of Growth+Europe+EM equity, 1/3 TLT and 1/3 cash (BIL).
On Brazil, good to see USDBRL consolidating around 5.00; this is a necessary step to prober 4.80 level, above valuations begin to go agaijst the trade. That said with such attractive carry all along the interst rate curve what’s not to love? Equities have been cheap for years but with this level of rates they wont go anywhere. BCB cuts Selic in August, latest September. Historically market underestimate size of rate cycles both up and down, no reason to think this time its gping to be different.