No News Is Good News

It’s been a while since I looked at markets, as I am busily trying to finish the second chapter of my new demographics project—see here—but peering across my portfolio, I haven’t missed much. Granted, the straight-line rise in green and clean energy stocks—a theme that I am invested in—has petered out, but otherwise, most of what I own keep going up, and the number at the bottom of the column keeps getting bigger.

Investing in a pandemic-stricken world, it seems, isn’t too bad. When I haven’t looked at markets for a while, I tend to go back to the basics. The first chart below plots the six-month stock-to-bond return ratio in the US, which has been locked at +20% since the beginning of the fourth quarter. This is punchy, even unprecedented, but I am loathe to second guess this trend at the moment.

Sustained positive stock-to-bond returns tend to be associated with resilient bull markets, and let’s be honest; that’s what we have, for now. I worry, as I suspect does everyone else, that investors have bought too aggressively into the rumor of a post-virus recovery, implying that they will sell the fact. If that’s true, conditions will become more difficult over the summer, and in the second half of the year, though I am inclined to believe that any swoon will a familiar case of "BTFD."

In the meantime, the second chart below shows that equity volatility is still falling, a trend that I predicted earlier this year, upon realizing that a normalized VIX index was still elevated relative to a similar index of the MOVE. In level terms, the VIX has declined to just over 16 so far in April, and the question is why it shouldn’t drop further to the low teens, which has previously been the floor during previous periods of sustained gains in equities.

As the US and UK economies are hopefully about to provide the first glimpse of what post-virus pent-up demand looks like, investors are left contemplating whether reflation—and the associated shift in asset prices— is actually sustainable, or merely a temporary ruse. The numbers, as always, are inconclusive.

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