Income & Fixed Interest Newsletter – March 2018
There are two attitudes you can take to the February 2018 “flash crash”. The first, and overwhelmingly the most popular, is that this was a technically driven correction in the markets, exacerbated by carry monkeys such as the short-VIX crowd, and that the pause since then has provided a refresh in a bull trend that remains well and truly intact. The second view, and much closer take to ours, is that the highs seen in the S&P 500 index on 26th January will be the highs of this cycle and the ensuing volatility marked the beginning of a protracted period of adjustments needed to realign asset valuations with a new reality. I suppose there could be a third attitude which is that the February crash signalled “game over” and equity markets are going to be taken round the back of the bike sheds for a kicking, and normally I would be the first to voice that position, but not right now. Not yet.
As Q1 drew to a close, we were hearing a mix of optimism and caution among our client base, with questions ranging from “shouldn’t you be less bearish given the tax deal struck in the US?” to “why has LIBOR-OIS widened to crisis levels and does this mean we’re on the doorstep of the next market melt-down?” Certainly a lot has happened over the last three months, some of which have been obvious (US tax reform) and others less so (LIBOR-OIS), and a lot is still going on (threat of trade wars, Facebook probes). In this month’s newsletter, I’ll try to piece together the bigger picture as we see it, what it means for markets and asset allocation, and how we’ll position for our views.