Traders might feel compelled to dust off their playbooks for late-cycle investing lately, says AllianceBernstein strategist Richard Brink, but this isn’t your typical late cycle, and typical late-cycle responses might not apply this time around.
“Today’s market has been shaped by extreme and unusual policies over a decade,” Brink wrote in a recent note co-wrote by AB portfolio manager Walt Czaicki. “Fiscal stimulus, debt levels, deficits and demographics are adding some uncommon ingredients into the late-cycle stew. Taken together, these could extend the late-stage features of the current cycle for much longer than usual.”
Late-cycle is usually defined as a period during the latter stages of an economic expansion, when growth naturally slows and some investors switch to a more defensive stance in their investment portfolios, in anticipation of thinner returns.
In our chart of the day, Brink rewinds to the beginning of the supercycle in 1981, when the fed-funds rate topped out at 19%. “Several things began to unfold that would dramatically change market dynamics for a generation,” he said.
Over that first 20 years, interest rates and inflation declined, baby boomers entered their prime earning years, and a wave of globalization and technological progress led to productivity and profitability on an “unimaginable” scale.
“This powerful fundamental cocktail drove real wage gains, corporate sales, earnings and, ultimately, the stock market, creating a bull run that lasted nearly two decades,” Brink noted,
Then the dot-com bubble happened and the seeds of the housing crisis were planted, which led to another market implosion in 2008 that paved the way for the birth of what Brink calls the “Great Beta Trade” in 2009.
“Investors could ride the market beta wave effortlessly; since many investment funds with diverse strategies benefited, investors didn’t really need to be aware of what was driving performance,” he explained. “And with so much money sloshing around the markets, downturns were mild and usually corrected themselves quickly.”
In other words, the gaudy returns of the past decade weren’t driven by economic or corporate growth, but by a flood of cheap and easy money.
And, Brink says, therein the rub.
“Leveraged returns are not sustainable,” he said. “Investors might cheer at net margin improvements and rising valuations. But it’s really just a prolonged sugar rush, without any sustainable nourishment in the form of real revenue gains or economic growth.” Bring used the Trump bump, which has already begun to fade, as an example of the fleeting aspect of this rally.
With it all coming to an end, Brink warns, the next decade won’t be nearly as friendly for investors, as the fiscal deficit widens, the debt burden balloons, baby boomers retire and geopolitical tensions mount. So what’s an investor to do?
“There’s no precedent in modern financial history to help us navigate these conditions,” Brink concludes. Yes, welcome to “the uncertainty of what may become the late, late cycle.” Good luck.
The market
Futures on the Dow US:YMH9 are leaning lower, with both the S&P 500 US:ESH9 the Nasdaq US:NQH9 following suit. The dollar DXY, +0.34% is up slightly and gold US:GCU8 is getting a nice lift early. Crude oil US:CLU8 is logging a gain of more than 2%.
Overseas, the FTSE 100 UKX, -0.15% is softer in the early part of its post-Easter session, pacing a mixed session in Europe SXXP, +0.22% Asia markets ADOW, -0.91% closed lower, though the Nikkei NIK, +0.58% bucked the downtrend.
The call
The Joe Biden stock market would be serious blow for investors, according to a post from Candy Matheson on the Slope of Hope blog. She says that, should he become president and bring back the Obama/Biden policies, the S&P SPX, +0.16% could plunge back to pre-Trump level of 2,200
“In the two years since President Trump took office, the SPX has gained around the same number of points as it did in the last four years of Obama’s presidency,” she wrote. “Those gains are in jeopardy, as uncertainty will weigh on markets in anticipation of a possible return to a more socialist agenda under Biden.”
The buzz
Police say almost 300 people were killed and some 500 injured at last count in eight Easter Sunday blasts that rocked churches and hotels in and just outside Sri Lanka’s capital. The island nation’s defense minister described the explosions as terrorist attacks by religious extremists.
Boeing BA, +0.68% doesn’t need this, but safety concerns are being raised about another one of its planes, the 787 Dreamliner, according to a New York Times report. The jetliner’s South Carolina factory “has been plagued by shoddy production and weak oversight that have threatened to compromise safety.”
Two days before Tesla TSLA, +0.75% is slated to post quarterly financial results, Elon Musk is gathering investors Monday to reveal the electric-car maker’s latest efforts to develop self-driving car technology and his strategy for deploying it.
“The Curse of La Llorona,” a horror film from AT&T’s T, +0.25% Warner Bros, topped the weekend’s box office, but it won’t last long. “Avengers: Endgame” opens later this week, and there’s little doubt that, if it lives up to the hype, it will crush the competition for the foreseeable future.
Robert Mueller doesn’t exactly open up when he’s “ambushed” by a reporter following an Easter Sunday service, which leads us to…
The quote
Reuters
Rudy Giuliani
“There’s nothing wrong with taking information from Russians” — Rudy Giuliani, Trump’s lawyer, in an interview with CNN’s Jake Tapper.
The stat
$1 billion-plus — That’s how much has been donated to rebuild the Notre Dame Cathedral. Some, however, believe that money could be much better spent on more pressing issues, like poverty.
This NSFW tweet captured that sentiment:
My book is now available as a 15-second TikTok from this genius. pic.twitter.com/8pdXy92bhb
— Anand Giridharadas (@AnandWrites) April 19, 2019 The economy
Existing home sales, one of this week’s highlights, hits at 10 a.m. Eastern. The consensus is calling for a slight dip from a year ago. New home sales is slated for Tuesday. Before all that, the Chicago Fed National Activity Index is released today at 8:30 a.m. Another measure investors will be eyeing arrives on Friday, when the advance estimate of first-quarter gross domestic product is due.
Random reads
It’s a great time to be alive. for pickpockets.
Life after Columbine, as remembered by students who were there.
You’re not getting enough sleep and it’s killing you.
Is prison necessary? This woman might change your way of thinking.
Essential financial life skills Americans will need in the 21st century.
David Crosby’s hot take on The Doors:
basically sucked ...guitar and drums pretty ok ...keyboard was awful ..his bass with left hand was abysmal, horrible ...square wheel bad ...and Morrison was no effing good as a singer or poet ..poser ....sorry https://t.co/XPzLQ6gLtf
— David Crosby (@thedavidcrosby) April 20, 2019
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