Great chart out today from the Cross-asset research team at Morgan Stanley. It shows ranked asset class by returns with green indicating that returns beat inflation. Everything last lagged inflation as growth slowed and the Fed tightened policy. There was nowhere to hide in 2018, observes the MS team..
“So far, 2019 has been the exact opposite. Almost everything is beating inflation to start the year. The dovish shift from the Fed played a key role, but so too did depressed sentiment and valuations to start the year. The question, of course, is can this continue? We are skeptical, and do not advise ‘chasing’ this move. The market’s assumption is that ‘the worst is behind us’ for earnings, given strong performance during 4Q18 reporting and already-large downgrades to numbers. But 1Q19 looks like the real test: The quarter will see much weaker growth, and much harder currency and tax comparisons than 4Q18, especially in the US”.
The collection of charts below I think elegantly sums up the warning signs of either a slowdown or a much sighted “pause for breath”.
My own view is that we are probably not in trouble, yet. If the central banks boost confidence, we could see another rebound in the next few months.
Alternatively, we could see growth simply slip back to its recent anemic trend. Equity flows certainly suggest that the latter scenario seems more likely for most institutional investors.
According to analysts at Deutsche’s US research desk fund flows continue to rotate towards bonds and out of equities. “Bonds funds have continued to rake inflows ($11.4bn this week) across almost every category, while large equity outflows persist (-$7.7bn this week). Year-to-date, bond funds have seen almost $150bn in inflows while -$50bn has moved out of equity funds. The persistent outflows despite the strong equity rally are unusual but as we noted last week, have been driven by investors chasing falling yields. The pace of bond inflows and equity outflows, in turn, should eventually abate if yields stabilize”.