Month on Month Volatility
Usually, we see markets act like a damped spring, a market shock which then dissipates its energy and eventually the system returns to equilibrium. We expect volatility to be high in the short term and markets will settle down in the long term. I mean you'd hope so but here we are.
The monthly return for equity markets has been challenging to say the least, as time goes on there has been a marked increase in volatility. I'm not kidding, things are actually getting wilder, the market is quite literally getting more volatile to a level this is the first time I've been able to show the "megaphone" pattern visually well.
When Mr President keeps opening his mouth, it is difficult for the market to calm down a little. In fact, stupid things are said, and the energy keeps rising. The oscillations are getting wilder.
Both risk and opportunity when rebalancing portfolios!
American Exceptionalism
What a statement! Was thrown around plenty by fund managers before Trump was inaugurated.
America's true superpower is not its military or its nukes or similar, its real superpower is that it is the home of pure unadulterated capitalism. It is hard coded into every level, from individual, to corporate to government. Individuals have lots of opportunity, corporates are hilariously profitable and the government is geared to support its businesses by projecting power overseas.
But under the guise of "fixing" or "resetting things" the administration seems to be completely determined to jeopardise the core of their economy. Quick update on where we are today:
- Institutions to support individuals are being cut down and migration stifled.
- Corporate earnings are going to be hit by tariffs - effectively socialising some corporate margin
- Tariffs are inconsistent and hurt ally and adversary alike
- Supply chains are simply not geared for the whipsaw effect here - this is COVID all over again for consumer goods in the US (we're fine!)
- Under the guise of "controlling spending", DOGE is cutting the tools the US uses to project its soft power (USAID etc). Soft power is real power.
- Seriously I'm stunned they've defunded tools that supports corporates overseas
To be honest, I actually don't think the 10% tariff is all that bad! If you called it what it really is - a 10% VAT on imports - and left it at that, sure it might be political suicide but everyone would look through the one-off effect. But all the other trade imbalance nonsense is exactly that.
The question is whether any of this is supportive to growth in corporate earnings? And how do we go about playing this?
Earnings x Valuation
PE Ratios in my view represent the demand/supply balance of investor confidence. When consumers and investors are confident, it is reflected in markets "going up irrationally". Sometimes markets sell off and sometimes they remain expensive - but trying to determine future PE ratios is like reading tealeaves - it is what "time in the market rather than timing the market" is so relevant. Let's not waste our time there.
The main thing that matters is earnings - corporate earnings, EPS growth, call it what you want - but this is the really important stuff. Sometimes PE ratios fall ahead of a fall in corporate earnings - investor confidence falls because the economic ~vibes~ feel off.
PE Ratios (ahem, investor confidence) provides a multiplier effect to varying levels, but the starting point for everything is earnings need to grow.
The upcoming earnings period for the US is the most important in recent history. I'm expect guidance for many companies to be pulled which means inevitably uncertainty will take hold - it doesn't even matter if earnings fall as I'm beginning to question whether uncertainty is priced in today.
And yes, the US is not representative of the whole world (ASX200 is up vs MSCI World in April) but the US makes up 70%+ of MSCI World and is probably the most important and concentrated part of "balanced" portfolios.
Luckily, time's arrow has a hand in outcomes and the clock does keep ticking - 8 July 2025 is when the 90-day tariff pause ends.
Unless there is a proper outcome between now and that date, one can expect uncertainty to be priced into and out of markets to varying degrees as the spring is not damped. My biggest worry is markets rally to 8 July, price things in perfectly and then... disappointment again.
Path of maximum pain.
Pockets of opportunity I expect will keep appearing as this volatility persists until we have clear guidance on tariffs, we can quantify economic effects, effect on corporate earnings and whether the fed steps in - until this point we're at the mercy of varying levels of investor confidence.
Final note - look through the noise
I firmly believe in 3.75 years' time that we will look back and realise a megalomaniac in charge was all noise.
The happening of greater significance today is progress in AI - I simply don't think people realise how fast things have progressed over the last 6 months.
ChatGPT was released in November 2022 and models are significantly more advanced today. I use 4 different LLMs day to day, talk to AI all day long, and still get shocked whenever there is a new release - AI models are improving exponentially, not in a linear fashion. We are simply not geared to process this.
And then we get onto Autonomous robotics - We're through the looking-glass here people. The robotics components to build these are available off the shelf today and LLM models are advanced enough to run these today too. Not yet executed at scale but we're here now. This is everything from humanoid robots to 95% self-driving vehicles.
I pose this question - How would your life change if you could buy a $50k robot that can do the dishes, the laundry, fold your clothes, clean the house, most annoying chores?
Imagine having a robot that can replace a line worker - something that can work for 24 hours, is more accurate, more consistent, asks for no breaks, no worries about safety compliance, no pay negotiation, no unions.... (BMW testing humanoid robots reporting 3x increase in productivity on their production lines)
We've arrived at the iPhone moment for robotics which I believe will occur in the next year or so.
Look through the Trump nonsense, are you ready for AI? Is anyone?
Truth is stranger than fiction is stranger than truth - That Simpsons reference earlier is the episode where Lisa becomes president after taking over from President Trump (!).