Evan Harp sat down with 3EDGE Asset Management’s Eric Biegeleisen to discuss their latest outlook and how they are thinking about the rest of the year.
Harp: I feel like every year has been unusual lately. But what are the most unusual qualities or circumstances of the market in 2024?
Biegeleisen: We’re very macro and we look at valuation, economic, and behavioral factors. There’s generally something interesting happening, to your point, each year. Certain years rhyme, but they don’t always turn out exactly the same.
We entered the year with this belief that the Federal Reserve, Jay Powell and team, were probably going to do six cuts this year. It seemed that maybe inflation hadn’t gotten down to two percent, but it maybe would get close enough. The Fed’s view was, “great, we’re going to lower rates.” I think the market was excited about that. We saw the market start the year off strong in Q1, particularly US equities, hitting a high at the end of March. Then, there was a bit of a selloff in April, but throughout the first quarter – and then even continuing through April – we just saw a ratcheting down of market expectations for cuts. They suddenly went from six to four and then to three.
Now, most people are calling for one and probably post-election. You even have some folks talking about interest rate hikes now with inflation being too stubborn! Just a couple of Fed cycles ago, it sounded like, no matter what happened, whatever the data was, the Fed was lowering rates.
With the Fed meeting last week, a hike seems unlikely but we’re going to watch the data and chances are the next move is a cut. The Fed is walking a fine line. They probably don’t want to be politicized with the upcoming election. We’ve had strong job numbers, a little lower than anticipated, but unemployment is low, below 4%. For this extended period of time, that is very unusual.
A Broadening Rally
So, generally speaking, there is positive growth and decent earnings. You’ve had a broadening out of this rally away from just the Magnificent Seven and into more stocks. The general feeling is things are good across the board, and yet we saw a selloff in April. You still have unprecedented debt. You have the potential that the extreme level of interest rate increases may turn the economy over, although that hasn’t happened.
Yet, we’re entering a world where these high interest rates may stay higher for longer. And they might start to manifest through the economy, through corporate earnings, through the government’s balance sheet – which now is going to have to deal with actually paying a very significant interest burden ahead of itself. Going back to the original question, the unusual part is that the expectation for rate cuts has declined so much and yet the market continues to make new highs and find footing. It’s been interesting times for sure.
Where Biegeleisen Sees Pockets of Attractiveness
Harp: Yeah, it feels very much like a tale of two markets – the one that we keep thinking we are going to have and then the one we actually have. Adjacent to all of these, there’s a whole host of bad news in the world right now. Given all the question marks and global challenges, where do you see the most cause for optimism in the markets?
Biegeleisen: We’ve been seeking some pockets of attractiveness, particularly in Japanese equities and Indian equities. India is a potential growth market, they’ve had solid GDP prints, you have an upcoming election, there is likely to not be a change of power. You have that government doing whatever it can to help stimulate the economy in the front side of that election and you’ve seen growth. You’ve seen an increase in the services being exported out of India. We believe India remains an attractive market, despite, being overvalued and has the catalysts to continue growing.
Japanese Equities
Similarly, we’ve seen potentially attractive opportunities in Japanese equities. A concern there has been the yen. Recently, we’ve seen the yen weakening to levels that the Bank of Japan had not historically let it weaken past. While they have not come out and admitted it as much, everybody kind of agrees that it must have been the BOJ that stepped in to support the yen at least once, maybe twice in just the past week.
Will yen volatility and the carry trade stay? That’s a question mark. Historically, yes weakness is attractive for exporters. The Bank of Japan was the last major central bank to bring their rates back above zero. I think the T-bill there now yields something like two or three basis points positive, which is a big deal compared to where it had been at negative five or negative ten basis points or more for an extended period of time. I think folks are used to that and then I presume that the BOJ wants to continue to ratchet rates up, which could hurt an economy that is so heavily indebted relative to GDP.
Again, just like in the US, we’re talking about the interest service burden, you’re paying almost nothing on a massive amount of debt and then you start to pay something on a massive amount of a debt – it’s a big number to cover that interest expense. So that can be a concern as we move forward. But, in the shorter term, we like that market.
Gold’s Surprising Strength
Harp: That makes a lot of sense. What is something that not enough investors are paying attention to?
Biegeleisen: Well, I’m not sure if they are or aren’t paying attention, but I’ll say another area that we think is interesting is gold. You know, the lump of metal that does nothing and collects dust on a shelf! [Laughs] Some might say that that’s the asset that’s not moving at all, and that everything else is revolving around it as this is a true fixture to measure everything else against. The strengthening of the dollar, real rates going positive over the past year or so and really ramping up – that’s been bad for gold and yet gold has actually reached new highs here. This flies in the face of these types of factors, which has been interesting.
You’ve seen a lot of central banks around the world buying and storing gold. It may be because they feel we’re entering this deglobalization period. Other central banks want to have less dollar dependence, and hoarding a bit more gold is a way of getting away from the dollar. That’s potentially what’s going on. They’re driving that higher, but we could see real rates decline and that could be a tailwind for gold. Also, there are several geopolitical conflicts going on in the world. They seem to be getting more aggressive and growing in size and scale. That, in theory, could also be good for gold and potentially an interesting area for folks to look at.
Teasing at the Future
Harp: How is 3Edge approaching the rest of 2024?
Biegeleisen: We continue to expand our suite of products and services to ensure that we can meet the demand of our clients. There are several exciting things in the pipeline that I hope to come back and discuss with you this fall!
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