Equities have modest upside absent significant progress in Washington or a strong reporting period which starts in earnest with the banks late next week.
Week in Review: What makes a super hero? Invincibility? Super-human strength? Resilience – the ability to shake off adversity? All of the above! Superheroes are magnetic, drawing in the masses, exuding a confidence that others glom onto, comforted by a sense that ultimately all will be okay, even, if at a particular point, it seems that the chips are stacked against a positive outcome. I'm not talking about complacency; nope, that would evidence a lack of any concern at any time; that would be boring. Does any of that sound familiar? Of course it does – all of it. I'm not channeling Superman or even the more believable Stallone, circa Rocky I. I'm talking equities and treasuries. A hawkish Fed? No match for the markets. D.C. gridlock, both interparty and intraparty? Swatted away like a NY Times reporter at a presidential press conference. Healthcare reform? Tax reform delayed longer than a reservation at The Polo Bar? Russian scandal? A floundering administration? Air strikes in Syria? Come on, be serious; the markets are impervious to the collection of such trivial matters, most of which, standing alone, would have felled a lesser foe. Stocks hold on to full valuations and bonds rally. It really is incredible when you think about it, and we all have. But we hang on for the ride, cognizant, perhaps even concerned, about that kryptonite event, but while the ride has had some mild bumps we all remain invested, sanguine in the belief that our capital is safe and sound. Clearly, the one notable non-believer is Mario Draghi , he of the ECB, steadfast in his belief that the EU economy is not strong enough to exit QE. This is actually positive for the markets, although not for the banks. Free money to invest in an improving economy – what could be better? Maybe when the French elections are over he will get on board. Observations: Like Superman, like Batman and Wonder Woman, this superhero has a secret identity. What could it be? As James Carville famously intoned, it's "the economy stupid ." Long before the above noted slings and arrows of misfortune arose, there was hope; hope that we would have tax reform this year; an infrastructure bill and repatriation of assets held abroad, fueled by the Republicans controlling all 3 branches. Superheroes prefer to be unsung, to let others take credit for their efforts. So while the White House claimed credit for the S & P making new highs and for the strong March employment report, while ignoring today's payrolls miss, it was only partially true. There is no question that postelection optimism, both from Trump's election and Obama's exit, was impetus for a market rally. However, the real superhero in this story is the economy. A strong economy, abetted by what will continue to be extremely accommodative monetary policy, even with 3 hikes this year, becomes a near impregnable force. But unlike a superhero of yore, this one has a wingman and it's a synchronized global recovery as heretofore European laggards, such as Spain and Italy, gain traction, emerging markets rally and China's debt problems remain in the background. With an economy so strong, here and abroad, why have 10YR Treasuries and Bunds rallied so hard, hitting levels not seen since there was much less optimism, much less perceived strength in the economy? I can offer conjecture but no firm view as to why. There is a segment of investors that are concerned about all of the above seeking safety in Treasuries; sovereigns buying Treasuries for a 200 bp pickup over Bunds or other sovereigns, ex-currency implications; and others who are concerned about equity valuations, although not necessarily focused on the issues, exhibiting a preference for bonds, perhaps exhibiting a belief that the downside from that asset class's excessive levels is much less. But for every action in the markets, there is a reaction. So while the indices barely move, financials retreat, inversely correlated to bonds; retail stocks and autos get smeistered (a technical term); while tech moves higher and energy stocks recover ever so slightly. Outlook: So where to now? My view is consensus: equities have modest upside absent significant progress in Washington or a strong reporting period which starts in earnest with the banks late next week. Expectations for earnings and guidance are high, the product of a benign pre-announcement period and strong economic data. And although I believe repeal and replace is not dead and buried, the turning point in sentiment re: Trump's ability to execute, will depend upon the conditions of the revival. If the President crosses the aisle and Democrats sign on, we hit new highs in expectations of bigger things to come. If it sneaks through with a helping hand from the so-called Freedom Caucus, it may turn out to be a yawner. Whatever the result, confidence will be somewhat restored in the administration's ability to execute on initiatives that require a vote rather than a signature. The perception will be that we are back on course for policy initiatives that are more catalytic for the economy. Alas, this is not the prototypical movie where the packed bus teeters over the edge of the cliff, rocking back and forth, commuting schoolchildren screaming and pushing to the front when just in the nick of time, a superhero swoops in and steadies the vehicle before lifting it and everyone aboard, to safety. I think we're okay; not exactly humming What A Wonderful World but neither am I singing I Need A Hero. For that I am glad. (Mr. Weiss is the managing partner of Short Hills Capital Partners, a hedge fund advisory firm and asset manager primarily established to invest on behalf of one of the industry's most successful hedge fund managers. He has held senior management positions at SAC Capital, Salomon Brothers, Lehman Brothers and MSW Asset Management. He is the author of two investment books and a novel, is a visiting teaching fellow at UNC's graduate business school, Kenan-Flagler, and a CNBC contributor appearing regularly on "The Halftime Report.")
