* The Thundering Bull
Six years ago on March 6th 2009, the S&P500 index hit a low of 666. Today the
index is 2108. Total annualized returns since 3/6/09: SPX 23%, ACWI 20%, REITs
31%, high yield 17%. In our view, the bull protagonists are central bank liquidity and
tech disruption: the market cap of Apple ($752bn) now exceeds the GDP of Saudi
Arabia ($748bn).
* The Blessed & the Cursed
Excess liquidity has furiously reflated assets blessed with “growth”, “yield” and
“quality”, e.g., US tech stocks, REITs and high yield bonds, quality stocks in Europe,
Asia and EM. Conversely, excess liquidity has smothered the US dollar, volatility and
bond yields, and conspicuously ignored banks, EM, resources and commodities. Tech
disruption (and deleveraging) has kept inflation and interest rates low.
* The End Game
We think the bull market end-game is either inflation hurting bonds, EPS recession
wounding stocks, or speculative excess. Our 2015 Asset Allocation of long US
dollar, long volatility and long stocks over bonds reflects our belief that global growth
surprises on the upside this year and liquidity expectations peak. It also captures
the risk of speculative excess. We believe long Nikkei, short Treasuries is the purest
2015 macro expression of our current AA. The US dollar remains the roadblock for
contrarians in commodities, energy and EM.
* The March Trade
Risk ripped higher in Feb, thanks to bearish sentiment and policy (18 rate cuts YTD,
554 since Lehman). Sentiment now more bullish, the March FOMC looms, inflation
breakeven levels are surging, as is volatility in EM FX. We think banks would benefit
from a bumper Feb payroll, released on the six-year anniversary of the bull. In
contrast, overbought US/Japan/EU consumer discretionary and health care stocks
and Chinese banks appear vulnerable to a more likely risk-off reaction led by bonds.