Beneath the Surface: Risk Premium Expansion with Andy Constan

TL;DR

US equities experienced a rocky period, but the NASDAQ gained over 1%. JP Morgan CEO warns of risks ahead for the US economy. Inflation numbers and a Fed meeting are upcoming. Uncertainty surrounding long-term bonds and earnings expectations for 2024 and 2025 raise concerns for equities.

Transcript

foreign stay higher for longer hi everyone Welcome to the Real Vision Daily Briefing with me today is Andy constant CEO of damped spring advisors hi Andy it's great to have you back with us hey thanks Mary good to be back so we're looking at uh for the beginning of the trading week here in the US we're looking at an update for U.S equities I mean t... Read More

Key Insights

• 👲 Long-term bond sell-off has capped multiples for equities.
• ❓ Earnings expectations for 2024 and 2025 contradict recession concerns.
• 🧑‍🏭 Inflation predictions are uncertain, and the Fed's response depends on various factors.
• ❓ The supply of Treasury bonds is impacting bond prices and yields.
• ✳️ The normalization of risk premiums on bonds and stocks is necessary for overall market stability.
• ❓ A recession may occur when stock and bond prices decline, and earnings expectations decrease.
• ❓ The Federal Reserve's response to a recession may not be immediate or aggressive.

Questions & Answers

Q: What impact does the sell-off in the long-term bond market have on equities?

The sell-off in long-term bonds has capped multiples for equities, resulting in a few percent decline, particularly affecting the Russell, which is down six or seven percent. This implies that equity returns will depend on improvements in earnings.

Q: How do earnings expectations for 2024 and 2025 contradict recession concerns?

Despite concerns over an impending recession, earnings expectations for 2024 and 2025 indicate significant growth of 12% per year. This contradiction raises worries regarding the factors that will drive equity returns, particularly with rising bond yields.

Q: What are the expectations for inflation and the Federal Reserve's response?

Predicting inflation is challenging, making short-term trading decisions based on inflation numbers relatively ineffective. The Fed is expected to skip rate cuts in the upcoming meeting, with a possibility of a hike in September if the inflation number is low. However, the focus is on the Fed's expectations for rate hikes and cuts in the future, particularly for 2024.

Q: How does the supply of Treasury bonds impact the market?

The supply of Treasury bonds has been a significant factor in the dislocation of bond and stock prices. Insufficient supply has kept bond prices and yields below normal levels. However, with renewed supply, bond prices are rebalancing, and yields are increasing, reflecting inflation expectations and a Fed attempting to raise real yields.

Summary & Key Takeaways

• US equities have faced volatility, with the NASDAQ gaining over 1% but a warning of risks from the JP Morgan CEO.

• Inflation numbers and a Fed meeting are imminent, causing speculation in the market.

• The significant sell-off in long-term bond market caps multiples for equities, raising concerns over earnings improvements and the potential for a recession.