May 19, 2017
Soon after the financial crisis began to recede, an Internet meme began to circulate around the investment industry, cropping up on YouTube videos, coffee mugs and even hoodies. The exact wording varied, but generally the message was: "Keep Calm And Buy The Dip."
Internet memes are often dismissed as ephemeral nonsense, but the way they go viral underscores how memes can capture and even shape a zeitgeist, and BTD has been the dominant theme for financial markets since 2009.
This was once again underscored this week. President Donald Trump's mounting political woes finally spooked previously tranquil markets and sent global stocks down by 1.8 per cent on Wednesday, the most since September. But on Thursday money managers dived back in, undeterred by Washington’s turmoil, pushing the S&P 500 higher and paring the dollar’s recent fall.
“It certainly woke people up from the summer haze,” says Erin Brown, head of macro investments at UBS O’Connor, a hedge fund. “But I always ask myself two questions. Does this change the growth outlook, and does it alter the earnings trajectory? And the answer to both is no.”
Investors have in recent years internalised that political noise is just that. The Trump administration may now struggle to enact its pro-growth plans on spending, deregulation and tax, and uncertainty is always problematic for markets. But the so-called "Trump trade" has in reality not been a major driver of markets for some time.
More saliently for money managers around the world, the global economy finally looks in decent if unimpressive shape, and corporate earnings are healthy. As a result, 2017 is on track to be the first year of synchronised equity inflows to all major regions since 2004, Citi says.
Moreover, the Federal Reserve is raising rates slowly, and other central banks around the world are still buying a mind-boggling amount of financial assets. Already this year they have bought another $1.2tn of securities, and if that pace is maintained this will be another record year for quantitative easing, according to Bank of America Merrill Lynch.
Even an impeachment of president Trump — which at this stage still looks exceedingly unlikely — will be unable to rattle these fundamental truths. Indeed, some investors would even welcome the ejection of the volatile Mr Trump in favour of his deputy.
"I think the markets are hoping for vice-president [Michael] Pence to become president so to enact a more stable agenda," said Jim Chanos, the founder and president of Kynikos Associates said at a conference this week.
That is not to say there aren't reasons to worry. While the Trump trade has been fading for much of this year, most investors still on balance harbour some hope of easier regulations on banks and some kind of corporate tax cut, but if the administration is turned into a lame duck in its first half year that would be near-impossible to envisage. And the political landscape is likely to remain rocky.
“I’m surprised where the markets are when you think about all everything that’s going on,” says Marc Lasry, the founder of Avenue Capital. “For whatever reason today no one seems to think there’s any risk in the system.”
Pessimism is particularly apparent in the bond market. While the US stock market clawed back some of its Wednesday loses with a 0.4 per cent gain on Thursday, US Treasuries held on to their “flight to safety” gains, with the 10-year US government bond yield largely unchanged at 2.23 per cent.
Dan Ivascyn, the chief investment officer of Pimco, says that an impeachment of Mr Trump was “not a risk that we've specifically focused on” but that the firm has nonetheless been reducing its risk positions since the latter part of 2016.
“We tend to think about it from the standpoint of policy effectiveness,” he adds. “We have talked about tail risks and we have steadily been reducing risk. We have been selling into that rally gradually over the last several months. Risks are building.”
And the longer-term picture is murkier, according to Ray Dalio of Bridgewater. The head of the world’s biggest hedge fund group said last week that he could not foresee any major economic dangers for the next two years, but cautioned that the longer-term outlook was dimming, given rising political tensions, high global debt levels and central banks running out of ammo if economies weaken.
“We fear that whatever the magnitude of the downturn that eventually comes, whenever it eventually comes, it will probably produce much greater social and political conflict than currently exists,” Mr Dalio wrote in a blog post.
Moreover, many investors are concerned that the mounting inclination to buy every dip is unhealthy in the long run, because it constantly pushes valuations higher even as the possibility of an inevitable recession increases.
The US stock market suffers 5 per cent declines roughly three times a year, according to BofA, but aside from the quickly reversed tremor caused by Brexit in the summer of 2016 the S&P 500 has not had a major drop since early 2016. The bull run is already the second-longest in history, and is approaching the 1990s record of nine and a half years.
Ms Browne points out that there is “always something on the horizon” that can rattle investors, ranging from “known unknowns” such as the upcoming Italian election or the European Central Bank lifting its foot from the monetary pedal, to “unknown unknowns” that can come out of nowhere.
But for the foreseeable future, as long as the global economic fundamentals look reasonably solid, investors are likely to keep relatively calm and still buy the dips.