Israel-Hamas
Tensions are escalating in the Middle East, and the IDF is still far from achieving its key stated objective of “eradicating Hamas,” as some smart analysts predicted at the beginning of the military campaign. There have been a couple of Israeli intelligence failures after October 7th (concerning Hezbollah), which have come to light, but we won't delve into them in this update. It might be coincidental that the IDF announced a change of strategy around the same time as rumors of a deadline set by Anthony Blinken to Bibi Netanyahu, urging to “wrap things up by the year-end” during his last visit to Israel in early-to-mid December (2023).
SoftBank duped again
Meanwhile, according to the FT, Masayoshi Son has been duped again by another startup, this time in the crypto space. Speculators are hoping for him to hit a home run soon to keep their dreams alive. Never give up! A compulsive gambling leader, not into details, surrounded by a bunch of non-tech term sheet specialist former bankers is not a great combination. To be clear, a perfect term sheet on a bad investment is still a bad investment. Unfortunately, there is no financial alchemy that fixes fundamental issues.
Rates-equity delinkage
One of the most common misconceptions perpetuated by financial analysts and money managers is the impact of (risk-free) interest rates on equity markets. We won't rehash a topic covered in at least 10 previous updates over the past couple of years. To be clear, capital is periodically reallocated across various asset classes based on predetermined rules, which can, over shorter time horizons, fuel the narrative of higher bond yields leading to lower stocks. Otherwise, many people have managed to progress far in their careers without mastering Finance/Economics 101 basics. I'm living proof.
Financial engineers do what they know best
Of course, if your job primarily involves financial engineering and balance sheet optimization, it's easy to see why so much emphasis is placed on borrowing costs. Most business owners and operators take a different perspective. After all, do Twitter creditors really want to roll up their sleeves to run a social media platform post-bankruptcy, regardless of the price they get it? If only the banks had been kinder to the PayPal founders in their early days.
The empirical evidence
Fast forward to the present day, our analysis of the Spectra Market surveyresponses suggests that the 2024 equity outlooks are no longer (materially) shaped by Fed policy rates or Treasury yields, a stark contrast to this time last year. The better reference point might be early 2022, before the recession narrative entered the fray.
Consider the chart below, which breaks down 2024 S&P 500 targets by fixed income bulls/neutral/bears:
Recently, the pendulum has swung too far towards the thesis where interest rates have no impact on equity valuations. Also, a false generalization which misses key nuances in the formal literature.
Furthermore, the outcome of the US elections is not expected to significantly alter equity market performance:
Please note that these do not represent the voting intentions of respondents but rather indicate who respondents expect to win the US Presidential Election in 2024.
We grouped all “Biden” and “Other” responses together to maintain similar sampling errors, as an overwhelming majority expects Trump to win the election. The general findings remain unaffected when we split the responses, albeit with higher statistical errors.
It's a shame there is (currently) no correlation between market outlooks and the US Presidential race. Pollster are always eager find novel ways of teasing out voter intentions. It usually changes closer to Election Day when economic policies are set out.
