Among the many proofs that we are in a profoundly different climate compared to last year is the fact that there is much less talk about the future. Where did the sunset of fossil fuels, the final crisis of large-scale distribution, the internet of things, the electric car that drives itself, 3D printers and the use and abuse of the concept of disruption to indicate such technological revolutions radical enough to involve the imminent closure of entire productive sectors and survival limited to a few daring innovators?
This 2018, which also includes a January that brought the spirit of 2017 to its highest point, celebrates the glories of old and polluting oil, of moribund large-scale distribution (with stocks like Macy's up 20 percent), of the dollar on the sunset avenue, the index of raw materials (many of which have been in use since the Neolithic). As for innovators, with the conspicuous exception of Amazon, the climate is one of widespread skepticism. Anyone who achieves goals or exceeds them is not worthy of attention, those who fail to achieve them are severely punished.
The rotation from the future to the past is typical of bear markets. The bursting of the Internet bubble in 2000 was accompanied by a rise in commodity stocks. 2008 was different, because the bubble that had been created in previous years had been on a classic sector of the old economy, houses. This time it's back to tradition.
It is positive that the correction also takes place through rotation, because a significant part of the market is now invested in indexed products. The incidents that took place in the downturns of 2000 and 2008, when finance that had leaned too much towards technology and homes acted as a multiplier of the crisis, shouldn't happen this time.
It is even more positive that the market correction coincides with an explosion of profits in America and with their overall good behavior in the rest of the world. Attention, growing profits are not a guarantee of an increase for the stock exchanges (in 1987 they went up by 37 percent and Wall Street still produced a memorable crash), but they produce a faster correction of the multiples, which thus have a way of return to more sustainable levels (and more suited to higher rates) without this entailing an excessive sacrifice of quotations.
Of the ingredients that may suggest a correction is nearing conclusion, only one is missing, namely the significant reduction of positions. In practice today we have more sober expectations and even a slight veil of incipient pessimism, but we do not yet have such a light positioning as to make a buying rush necessary if the market turns upwards. In the absence of capitulation (or a last wave of sudden and profound fear) a recovery in the next three to four months will still be possible, but it will be tiring and asphyxiated.
Returning to the positive aspects, we consider this, in some respects, the focus of attention on the coming recession. This time there is no race to predict when, but the more humble race to adopt models that indicate the probability of negative growth in the next 12-24 months. At the moment, although rising, these probabilities are not very high, but it should be remembered that even 12 months before 2000 and 2008 they were not. What we consider positive is therefore not the predictive value of these models, but the fact that their very existence reminds us of the mortality of the economic cycle and induces us to behave more cautiously.
Having said that, it can reasonably be assumed that the next phase (between now and early autumn) will be less stressful than the one we are about to leave behind.
The first element that makes us think is the dollar, which has regained some of its lost strength. The stronger dollar (which in the coming period will continue to be supported by the gradual closure of the large number of positions still short) moderates US inflation as the base effect amplifies it (the base effect, in this case, it is the particularly low inflation a year ago at this time, which makes current inflation seem even higher year-over-year).
In turn, inflation kept under control (albeit rising) moderates the decline in bond prices, which have lost enough ground to suggest that the coming months will be more lateral than further down.
On this issue, it is pleasing to see, with Powell, a less neurotic Fed than previous managements. By speaking little, never raising its tone and, above all, avoiding getting alarmed and rushing to the rescue whenever the market throws a tantrum, this Fed demonstrates its strength and faith in its programme, while at the same time re-educating the market to walk with his legs.
Once the dollar, inflation and bonds have stabilized, the stock market will also have more room to celebrate the profits which, in the final balance of the first quarter, are overall even better than the most optimistic forecasts in America.
In practice, it is true that average portfolios worldwide have lost some value since the beginning of the year (in whatever currency they are denominated) but it is also true that values are more balanced today. No one likes to see the minus sign in performance over the period, but we must learn to weigh and evaluate not only the absolute result of a portfolio, but also and above all its solidity or vulnerability.
The ongoing correction has created serious damage only in very limited portions of the market, those linked to the sale of volatility. For the rest, the correction was well distributed and rational. The alternative would have been very dangerous. Continuing January's rally to date would have led to a May of realizations and, on the 1987 script, a fall of crashes. Let's not complain too much.
