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The writer is chief market strategist at Jefferies
It was shocking to see how gloomy so many investment professionals have become over the past two months. Countless clients, colleagues and competitors simply could not disconnect their disturbance over US political events from their fiduciary responsibilities.
These folks, after being radicalised by the mob of macro intelligentsia, spent their days predicting US policy failures rather than stoically focusing on generating returns on capital. Emotions should never be a part of the trading process. Just ask the king of dispassionate investing, Warren Buffett. “People have emotions, but you’ve got to check them at the door when you invest,” the investor said at this year’s Berkshire Hathaway annual meeting.
For the moment, we have too many investors spinning themselves into a frenzy. They opine on the risks of empty shelves at Target, a return to 1970s-style stagflation, the demise of dollar dominance, the end of the independence of the Federal Reserve and, the latest worry of the day, a debt-induced bond market collapse.
I have spent the past couple of months trying to push back on all the politically-charged negativity. While others were issuing recession forecasts and calling the end of US exceptionalism as a result of trade tensions, I argued that US President Donald Trump’s tariff announcements should be seen through the lens of game theory and its deployment in negotiations.
Likewise I believe that bond market stress could be countered through “Treasury Twist”-like operations to depress longer-term yields by shifting funding operations to shorter-term debt. And that the bond and equity rally post the 1985 Plaza Accord, which led to a devaluation of the dollar, could be a guide to how future US macroeconomic trends might play out in markets positively.
It is clear we are far from seeing the end of US exceptionalism. But on many days I felt like Kevin Bacon’s character during the parade scene at the end of Animal House, yelling “Remain calm, all is well!”
On the positive side of all the hysteria, this highly charged market is bringing about some excellent trading opportunities. Just look at the S&P 500’s 20 per cent rally from April lows or the 33 per cent gain in the Magnificent Seven tech stocks.
Even though all does in fact seem to be well after the market chaos of the last couple of months, sceptics are still anxiously looking for any market setback in order to justify their panicked calls to dump riskier assets at the April lows. Sadly, I am sure we have not seen the last of those nervous naysayers temporarily driving the market narrative. The key for long-term success will be to tune out all that short-term nonsense when it starts to overwhelm the price action.
Looking ahead, the fact that so many folks are stuck in this doom loop continues to elevate my confidence in the risk parity trades that seek to diversify exposure across bonds and equities. I began this year with the idea that stocks could easily post double-digit total returns while short-term Treasury yields would drop at least 1 percentage point. Given the extreme bearish positioning in both equity and bond markets over the last couple of months, I now have far more confidence in this outlook.
But even without this, the fundamental set-up is bright, with the potential for a nostalgic return of the bullish trends that drove markets in the 1980s and 1990s. The move towards business-friendly Ronald Reagan-style policies of low tax and less regulation, along with a Plaza Accord-like “competitive revaluation” of the dollar, is producing serious 1980s vibes. And the AI revolution is surely giving off Goldilocks-style internet revolution of the 1990s vibes.
Are the 2020s on their way to becoming the “exceptional” progeny of the combined 1980s and 1990s disinflationary bull markets? It sure feels that way. With expected US earnings- per-share growth for 2025 of around 15 per cent, it is certainly not out of the question that the S&P 500 index could rise to a level of 7,000 from the current level of around 6,000 and reach a price-earnings multiple of about 25.
In sum, the case for stronger disinflationary growth, led by 80s-style deregulation and 90s-style productivity gains, is not being recognised enough in current market valuations. The naysayers have simply let their politically inspired gloom damp their economic outlook. Instead of stagflation, we could have the opposite. And for those that instinctively reject my analysis, they should be wary of making the same mistake so many made in April.
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