by Greg Silberman
I recently returned from Charleston, SC a most charming of Southern cities if ever there was one.
I attended a two day manager due diligence seminar at the famous Belmont Charleston Place.
It was the first time I had undertaken a speed dating approach to interviewing managers.
It was a highly effective use of my time and I managed to take 21 meetings in 2 ½ days.
In many instances I was reconnecting with firms I had done business with in bygone years.
One such case was my sit down with value Manager Schafer Cullen.
I was impressed with their macro analysis – not least of which because it echoed my own – Confirmation Bias right!
The Two data points I thought of interest were:
1. The effects of Quantitative Easing on the local market one year and two years from inception;
2. The effect on equity markets six months following the first interest rate hike.
Taken together I think you will see an interesting timeline appearing … but I’m getting ahead of myself.
Effects of Quantitative Easing
To say quantitative easing or ‘QE’ doesn’t work is perhaps an oversimplification of a complicated topic.
QE has worked very well when it comes to raising local market equity prices – its ability to create self-sustaining economic momentum is less convincing. Here’s the record so far:
1 Year USD Total Return
2 Year USD Total Return
Source: Schafer Cullen Capital Management (SCCM); Bloomberg
* Draghi issues his Bazooka comment implying they will do “whatever it takes” to ensure economic growth through monetary accommodation
It can be argued effectively that both Japan and China are currently engaged in their own quantitative easing. AND no mention is made of the upcoming Treasury maturities on the Fed balance sheet and concomitant reinvestment which could be simulative?
Let’s keep it simple and say the only effective QE in town today is by the European Central Bank – and that has at LEAST one more year to run.
If the above record is any indication, European equity markets have another 9 – 12 months of upward biases ahead of them.
[Seen as though the correlation between equity markets is generally positive we will assume it unlikely the US markets would fall lower under this backdrop].
Effects of Interest Rate Hikes
The second Gorilla in the room.
SCCM’s Research has shown that the average U.S. equity market correction 6 months following the first rate hike is -9.3%
That takes into account rate hiking cycles beginning 1977, 1986, 1994 and 2004.
It would be remiss not to state the full intention of their study was to prove empirically that International Markets (Europe in particular) tend to outperform the US during these periods – interesting but a fact we are not concerned with for the specific purposes of this note.
It behooves us then to listen to rate hiking rhetoric coming out of the Fed – something admittedly we don’t find much value in doing.
In essence, and here I am borrowing judiciously from the recent IMF statements that the Fed shouldn’t raise rates until 2016.
The reasons provided are:
· anemic inflation (and deflation abroad) – Aprils CPI month on month numbers was a low +0.1%
· GDP growth contracted in the first quarter (and subsequently revised to an equally anemic 0.2% quarter on quarter annualized growth)
· Wage growth of 2.2% per year which is below the Fed’s stated goal of 3.5%
Regardless, there seems to be sufficient debate to postpone any rate hikes to at least October and likely into early 2016 per CNBC – and we are not even talking about the pithy amount of said rate hikes.
The Bigger Picture
Taken together – and we freely admit to data mining at its worse – there is an argument for more of the same (range bound equities) or even a break higher for equities over the next year before any rate hikes begin to take their toll.
In which case we gasp at the effect that would have on the already BOILING hot space of venture capital valuations! More on that in a future piece….
Thank you for reading my post. I regularly write about private market opportunities and trends. If you would like to read my regular posts feel free to also connect on Linkedin, Twitter or via Atlanta Capital Group.
Greg Silberman is the Chief Investment Officer of Atlanta Capital Group. Atlanta Capital Group specializes in creating custom private market solutions for RIA/Family Office clients and is an active acquirer of independent wealth management practices.
Advisory Services offered through Atlanta Capital Group.
Nothing in this article should be interpreted as a recommendation to buy any security. Please conduct your own due diligence.
Main picture source: Iswanto Arif