The equity markets have been more volatile recently. Some of you have asked us our opinion about what might be going on. Here are a few things that have caught our attention:
Markets have a way of incorporating expectations about the economy into prices long before government data tells us what went on. They appear to be pricing in a slowdown in US activity. We cannot say if this will continue post summer doldrums, but it would be wise to pay attention to what both the bond and equity markets say in coming weeks.
Here is evidence for the slowdown view:
1. Treasuries seem to be questioning the pace of the US recovery. The ten year yield rose to 1.74% in March, almost exactly a year after the depths of the COVID stock market bottom. Today the ten year yields 1.28%, down 0.46% from its peak.
2. Low volatility and quality stocks have been leading the US market recently, along with defensive sectors like utilities and healthcare.
3. Small company stocks’ and value stocks’ performance peaked in March along with the ten year yield. Such stocks do best in an economic recovery.
1. Afghanistan is not integrated into the global economy. The economic impact of the Taliban takeover on the rest of the world is zero.
2. Estimates for US spending on the Afghan war run from $1 to $2 trillion. That is a lot of money. It could have been better spent elsewhere. Still, US GDP is currently about $23 trillion a year. One trillion is over 4% of one year’s GDP but only 0.2% a year over twenty years. Wasteful yes, but its impact is negligible.
The Communist Party has been targeting offshore listings, companies that have gained market power within China and the education sector. It is difficult to say what the ultimate goal is. Is it control of the economy, cutting potential rivals down to size, desire to see listings done domestically? Is this a buying opportunity or a signal to avoid China altogether? We cannot say. It has created uncertainty and volatility and is worth watching in case it does create an opportunity.
The following chart of EMQQ (Black), a tech focused ETF with 62% in China, shows how impactful Chinese government moves have been on its market. QQQ (Gold), the US tech ETF, is in the chart for comparison.
The Team at Park City Family Office