Cheap and expensive its all relative

As the holiday season remains in full swing ahead of the Bank Holiday weekend, it is a quiet week for macro data. We did get to see the minutes from the last meeting of the members of the Federal Reserve. This is a backward document, but the minutes did reveal a wide variation of opinions as to the path of interest rate policy going forward. Some members wanted no change, others a quarter of one pct cut and some even more action. On balance one gets the sense the market felt the minutes reflected a rather more hawkish view from the committee overall than some might have anticipated. Jerome Powell’s speech on Friday at Jackson hole may give a greater indication of where the Fed are looking in the coming months.

We also heard from the ECB today as the minutes from their last meeting were likewise released on Thursday. Ahead of the minutes the latest Purchasing Manager flash estimates for August were released. German manufacturing continues to contract, but overall the survey came in slightly ahead of expectations. However, nothing that is likely to change the ECB’s concerns that the euro area economy continues to struggle. The minutes acknowledged the downside risks to the economy and the need for continued monetary stimulus. The committee members did discuss the idea of further asset purchases. Commenting that they would look at options for the size and composition of potential new net asset purchases. Whether that would include buying equities we shall find out, possibly in September.

We have added a chart that illustrates how equities look relative to bonds in valuation. As one can see equities look attractive as bonds look more and more unattractive. This again provides another dilemma for equity and bond investors. Lower bond yields are an indication of a weaker economy which should lead to weaker profits for companies. Conversely the less attractive bonds become the more attractive equities do. As we mentioned in another piece with 17 trillion dollars of negative yielding assets and over 50% of the S&P 500 offering yields superior to that in the treasury market. One may not actively want to buy equities but for owners its hard to find alternatives.

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Posted on August 22, 2019 .