DON’T CALL IT A COMEBACK—WE’VE BEEN HERE BEFORE
The markets have staged quite a miraculous comeback over the past five weeks with most U.S. asset classes recouping a large portion, if not all, of the losses they experienced since the beginning of the year. Forgotten are the hard landing concerns over China, and global growth concerns that drove oil prices to retest low levels last seen near the beginning of the last decade. Pushed aside were the recession concerns that drove treasury yields back into the 1.6% range for the 10 year tenor, while IG spreads widened to levels last seen in 2011. The markets dysfunction at the beginning of the year can best be illustrated by the high yield market, where the average yield spiked 1.5 percentage points in a six week period, pushing average yields momentarily through 10%. All of this volatility and angst is forgotten as we have once again bought into the central bank “put” that has come to the market’s rescue as it has in so many prior crisis periods. The bounce has been especially impressive as the efficacy of monetary policy has been one of the bricks in the wall of worry. Efficacy remains a concern in our mind as the Yen and Euro remain stronger on a YTD basis despite the ECB and BOJ push into negative yield territory. This of course runs counter to generating inflation and economic growth, which we had thought was the main economic reason to go down this still controversial policy path. Currency manipulation remains an unspoken target for negative yields, although the stronger Euro and Yen can be counted as yet another unintended consequence.