Morning Note: Market news and our thoughts on the rise of US equities.

Market News

Gold is trading around an all-time high of $2,180 an ounce, as investors digest the key US Jobs report for clues on the monetary easing. February payrolls figure came in above forecasts (275K vs. 200K expected), but the job gains in both January and December underwent a significant downward revision and unemployment rate rose to the two-year high of 3.9%. Wage growth slowed more than anticipated, indicating a cooling labour market. Traders now see a nearly 60% chance of a 25bps interest reduction by the Fed in June. Traders will now turn their attention to tomorrow’s US inflation print. The 10-year Treasury currently yields 4.07%.

US equity markets slipped on Friday – S&P 500 (-0.7%), Nasdaq (-1.2%) – dragged lower by large cap tech. Warren Buffett’s Berkshire Hathaway sold a 1% stake in Apple.

This morning in Asia, markets were mixed. The Nikkei 225 fell 2.2% on growing speculation the nation’s central bank will raise interest rates lifting the yen and hurting exporters. Elsewhere, the Hang Seng (+1.4%) and Shanghai Composite (+0.7%) were both firm. Brent slipped to $82 a barrel.

The FTSE 100 is currently trading 0.2% lower at 7,638. Elliott announced that following multiple attempts to engage with Currys’ Board, all of which were rejected, that it does not intend to make an offer for Currys. In response, Curry’s share price is trading 11% lower this morning.

The Bank of England’s efforts to bring down inflation have been “totally ineffective,” M&S’s Chairman said. And with signs pointing to rates staying higher for longer, the pound – currently $1.2840 and €1.1738 – is beating more than 90% of global peers.

Source: Bloomberg

Market View – US Equities

The US market has continued to power ahead adding 24% in a straight line since the lows at the end of October to make new all-time highs.

Source: Bloomberg

This has caused many to question whether the asset class is in a bubble.  Unsurprisingly, there are dissenting views.  Identifying bubbles after the event is easy.  Doing it in real time is much harder and even when one does so correctly, navigating the bubble is a treacherous business, because unless one has the fortune of immaculate timing, the pain of not being involved on the way up is just as painful as being involved on the way down.

To highlight how difficult a proposition this is, we highlight the contrasting views of two of the most revered luminaries in the investment management industry; Ray Dalio of Bridgewater and Jeremy Grantham of GMO.  Given the stature and age of these two investing greats, we can be confident that the views they express are authentic.

In a recent LinkedIn article, Ray Dalio takes readers through a list of quantitative readings for the US equity market and concludes decisively that the US market is not in a bubble. “When I look at the US stock market using these criteria, it—and even some of the parts that have rallied the most and gotten media attention—doesn’t look very bubbly. The market as a whole is in mid-range (52nd percentile). As shown in the charts, these levels are not consistent with past bubbles.”

However, Jeremy Grantham sees things very differently.  "They're (US Equities) almost ridiculously higher priced than the rest of the world," he said.  "The stock market will have a tough year," he continued. American companies' profit margins are at historic highs relative to foreign rivals, creating a "double jeopardy" situation for stocks where both earnings and multiples could fall, he added.  Stocks would have slumped another 20% or 30%, he said, but the sell-off was "rudely interrupted" by the AI frenzy in early 2023 that "changed the flight path of the entire stock market." The veteran investor said that "AI isn't a hoax, as bitcoin basically is," but predicted the "incredible euphoria" around it wouldn't last.  In early 2022, before the big sell-off that year, Grantham called US equities a “super bubble” which he argues is only just beginning to unwind.

The fact that two investing titans can come to the polar opposite view on such a pivotal issue should underline the difficulty in making these big calls in real time.