What’s on our radar of stock market, economic conditions, and market insights.
Risk Heatmap for Current Market Conditions And Themes
As we delve into current trends in asset pricing, one must consider various themes that influence market behaviors and economic indicators. As we assess this date, it’s essential to reflect on historical market data and compare it to the present to gain insights into potential future trends.
While tariff news have taken the headlines in the recent month, a few fundamental drivers have been lurking beneath the economic machine and are worth our attention. Overall it is getting close to a late cycle regime and asset markets have been pricing accordingly.
- Economic Uncertainty: Left chart above showing an index of global (GDP weighted) economic uncertainty using NLP techniques, which stays at elevated level even after some de-escalation of tariffs conflict. Investment and big ticket consumption decisions are likely to be negatively impacted in the near term. Simply put, the elevated uncertainty requires some risk premium in the market.
- Geopolitical risk: while tariff risks are related to geopolitical risk, they do not entirely share the same dynamics. A withdraw of US impact is a more profound and longer term risk to global asset prices.
- Valuation: equity market valuation is still rich, on standalone basis or relative to treasury yield, contributing to near term bearish stance. The recent drawdown is comparable to the 2021-2022 inflation spike episode but so far these moves are reflecting valuation compression and we have not seen the impact to earnings yet.
- Tariffs impact: while it has been tariffs on and off over the last week or two, even at 10% universal tariffs, the effective tariff rate(weighted by value of imports) for the US is about 20% compared to less than 5% over the past decade. So material impact to inflation and corporate margins are still at risk.
- US exceptionalism: global investors have been fading the idea of US exceptionalism manifested on currency, treasury and stock market. With long term international investors being the marginal seller, risks of higher yield in treasury market, and lower dollar is to the upside.
- Inflation volatility: what the market may be under appreciating is that the fragile supply chain and potential trade diversion resulting from near-shoring or friend-shoring can create a lot of short term price spikes here and there. One can expect inflation to have more up and downs from time to time. It may be tricky to find direct hedge for this other than rates vol products.
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