There are signs of healing in the financial markets, but markets are not yet out of the woods.
On the plus side, credit spreads have decreased, the two-year treasury yield has risen and is now above the Fed Funds rate, and the S&P 500 rallied over 60 points in April.
That said, stress remains in the credit markets, particularly in the short-end of the curve as evidenced by the spread between LIBOR and the Fed Funds rate.
All in all, however, things seem to be moving in the right direction.
One of the primary themes that can currently be found in
Blue
Shores’ client accounts is that we believe we are near a cyclical high in commodity prices, particularly in energy.
As such, we have positioned portfolios to be overweight in the consumer discretionary sector and underweight in the energy sector.
We are generally contrarians on this matter, but we believe consumer discretionary stocks have priced in disaster and that everything that could go right has gone right for energy prices (i.e. a secular demand theme from emerging markets is in place, geo-political risks have been priced in, speculators are active…).
Blue
Shores
believes global market currents are entering a transition stage.
If the U.S. dollar starts a sustained rally, many of the global investment themes of the past several years may reverse themselves (commodities may decrease in price,
U.S. equities may outperform foreign equities, and sector leadership may reverse course).
As such, we are carefully monitoring those data points that would indicate such a sea change is underway.
We entered a fully invested position back in March as investor sentiment appeared to reach a pessimistic extreme.
Since then, the “easy money” has been made and broader macroeconomic developments will likely drive equity prices over the coming months.
