An Unusual Environment

Yesterday, Chris Verrone of Strategas appeared on Real Vision to give us his take on the current environment in markets. He believes that the Fed is the root cause for the rallies we have seen in equities, bonds, and even Gold.

So, why are all three of these asset classes trading in sync? Chris notes that over the last 40-50 years, this has only happened one other time. To him, it's all about the liquidity, and that these indicators will be our best signal as to when the tide is turning.

"When you look at the backdrop, we do continue to like stocks. I recognize that we are back up to the levels that we have failed at for the better part of the last 18 months. But I think there's a couple key differences this time around."

Two data points that Chris mentions are 1.) New high data is expanding. The participation from individual names has been better than it has been in quite a while. And 2.) A lot of liquidity indicators are expanding, such as Money Growth. 

Going back to the last period, mentioned above, when all three of the aforementioned assets traded upward in tandem, Chris notes that there are some similarities to today's market. Most notably, it was a period of "easy money". 10-year yields were low. Gold was beginning to build a base and turn upwards.

"The message here, and this is maybe the difference from the last 12 months, we are back in this environment where liquidity is easy, Central Banks are easier than they have been in some time, and I think it creates a bid for risk assets...I think it's reflective of, when there's excess liquidity, everything goes up."

What is Gold attempting to tell us? While Chris isn't sure if the recent move in the precious metal is signaling the oncoming of an inflationary or deflationary era, something is starting to change. After all, we had a pretty long period of complete indifference for nearly seven years.

"I think that maybe more evident in Gold is the message that, at some point, there will be a bill that's due for all the easy money that's out there. I also find it compelling that when you look at Gold historically, it has worked in both inflationary and deflationary environments. Gold worked in the Thirties. It worked in the Seventies."

Chris tells us that, as someone who looks at charts and pictures, he doesn't really care what the reasons are. It's a major trend change and he wants to own it. He feels that any pullbacks should be used as an opportunity to get long. To him, it closely resembles late 1998 (and into early 2002) when Gold started to bottom out and led us into the next multi-year upswing in equities. Over the remainder of 2019, Chris sees Gold entering a consolidation phase, and the asset may potentially see a retest of the 1325-1350 range. Looking out longer-term, he sees Gold reaching 1750-1800.

In regards to equities, as Chris sees it, the trend is still up. Over the next year, he believes the S&P ($SPX) 500 could see 3300-3500, as a measured move of the range we have seen over the last year-plus. The S&P 500 is near all-time highs while the Russell 2000 ($RUT) is not. Is this bearish? According to him, this isn't bearish at all. Three previous times in history we have seen the S&P 500 trade at new highs while Small-Caps have been at least 10% off their highs. These periods include 1985, 1991 and 1998. In all of those instances, Small-Caps did eventually catch up.

Chris does note that he thinks participation (away from Tech and FAANG stocks) is another key to a lasting rally. Last week, 50% of the S&P 500 made a 1-month high. He's seeing improvement in Restaurants, Hotels, and Biotech stocks recently. As far as Utilities and REITs (the "bond proxies") going higher, he does not believe this is bearish.

"It's a reach for yield. And as long as the 10-year trades at 2.00%, you're going to have people reaching into the equity markets to find bond-like returns."

In the Fixed Income space, he thinks there has been a blow-off move in bond yields. Despite the fact that yields are lower, we haven't seen Copper make a new low, nor have Emerging Markets. Chris believes yields will stabilize at current levels. 

Lastly, Chris brings to our attention the recent spike in the Policy Uncertainly Index. Following these types of moves, the index has actually been a signal for stronger-than-expected forward returns. When everyone is uncertain, you want to be buying.

One of the main themes that Chris attempts to push on investors is that we need focus on the message of the market and not the things that are hard to forecast. China Trade? Can't forecast it. Brexit? Nope. Yet, Brazil is making new highs. India is making new highs. Russia is making new highs. Australia is acting well. From Chris' viewpoint, there are some really good things going on around the world that have not gotten the attention they deserve. He is also seeing a consensus view on the worry over earnings. To him, tariffs (and things of that sort) are a "well-known" story and he's more inclined to be positioned on the opposite side of that sentiment.

Overall, Chris remains bullish on equities and sees upside potential towards 3500, or roughly 15%. He also sees a major shift in Gold underway and wants to be buying on any weakness, particularly a retest of the 1325-1350 area. Bond yield should consolidate around 2%.

As always, if you have any questions or comments, please feel free to reach out to us!