Why Storm Clouds Are Hanging Over the ‘Everything Rally’

By keeping interest rates at historic lows, the world’s leading central banks, including the Federal Reserve, have produced an “everything rally” marked by rising prices for a variety of asset classes, among them stocks, bonds, gold, safe haven currencies, and asset-backed securities. Investors have been active buyers of all these asset classes, anticipating that future interest rate cuts by the Fed and other central banks will propel their prices yet higher, The Wall Street Journalreports.

 “2019’s overarching theme has been the resurrection of the ‘Everything Rally’–where both equity and bond prices simultaneously rocketed together,” Richard Saperstein, managing director and chief investment officer (CIO) of investment firm Treasury Partners, writes in his 2019 Midyear Review. “However, for the first time in several years there are some causes for concern,” he warns, offering these specifics: “Trade wars grind on…the boost from 2017’s tax reform is beginning to fade…the global pile of negative-yielding debt has doubled in the past year.”

“The sum of these worries has started to drag down other fundamental indicators,” Saperstein continues. He notes that both actual and planned corporate capital expenditures are declining, partly the result of “uncertainty about the future of tariffs and the global supply chain.” In turn, declining capital expenditures will dampen GDP growth, he adds.

Gabriela Santos, global market strategist at JPMorgan Asset Management, has similar worries. She believes that uncertainty about trade will hang a “lingering cloud” over risky assets for at least another 18 months, as quoted by Bloomberg.

“There’s also evidence the pace of expansion is slowing more sharply than anticipated. Corporate growth plans in both the manufacturing and service sectors have been trending down since January,” Saperstein observes. Like many other observers, he will look closely at 2Q 2019 earnings reports and 2020 corporate guidance for “signs of stress.”

Regarding negative-yielding debt, Saperstein says that the global figure has doubled to $13 trillion in the past year. “Negative yields are an aberration. They distort capital allocation and encourage excessive risk-seeking. We don’t lightly apply the ‘bubble‘ label, but this looks like one. It’s not sustainable.”

Meanwhile, the price of gold is near its highest level in six years, partly because low yields on bonds make gold a more competitive alternative for investors, the Journal notes. Additionally, central banks “probably want reserves in assets other than the dollar,” Bart Melek, head of commodity strategy at TD Securities told the Journal. “They may be concerned over massive U.S. budget deficits and believe the Fed could be fairly aggressive in cutting rates,” he added.

Saperstein’s base case is for the economic expansion to continue through 2019, though at a decelerating pace. While he sees signs of stress, he does not anticipate a recession “in the near term.”

For many clients, Saperstein’s firm is putting cash balances and the proceeds from maturing bonds into short-term U.S. Treasury ladders. That’s because, as a result of the “everything rally,” the spreads between short-term U.S. Treasury debt and riskier bonds don’t appear “compelling” enough to justify reaching for a few extra basis points of yield. Meanwhile, Treasury debt is highly liquid and can be sold quickly if better investment opportunities arise.