Equity bulls retain footing in tumultuous week

Bloomberg

When it’s all done, when the bulls have been broken, historians will look back and have something definitive to say about this rally’s causes and consequences. Until then, we must settle for theories.
In a baffling week, oil tankers were attacked in the Gulf, America blamed Iran, and US stocks rose. President Donald Trump threatened to slap sanctions on a fellow Nato member and the fourth biggest economy in the world, and the riskiest US debt hit a record high. For the second week running, Treasuries and the S&P 500 rose in lockstep.
Academics will have the benefit of hindsight when they figure it all out. The rest of us will have to make do with hypothesis.
First, those resilient stocks. In spite of the miserable headlines, the S&P 500 climbed 0.5% in the five days. The easiest conclusion is that equity investors are betting on supportive central bankers helping juice either economic growth or asset values or both, and there’s plenty of
evidence to support that.
Something else to notice. The ratio between an index of safer, low-volatility US shares and riskier value shares has been testing its all-time high for a week now. The equity rally has not been created equal. Amid the broad updraft investors have also been girding themselves for a slowdown.
The resulting defensive bias also means investors are perhaps better positioned for shocks, like geopolitical incidents which cropped up in both the Persian Gulf and Hong Kong this week.
In the credit market, the riskiest US debt seemed to defy everything, from Trump’s trade brinkmanship to a precipitous mid-week plunge in oil prices — a commodity it has long had a relationship with.

Again, is it all about those central bankers? As junk debt hit a record it seemed no one in the market so much as blinked, and that makes sense with a mountain of negative debt out there and the tightening cycle likely over. It can last for now, but the Fed isn’t the only determinant of credit prices.
“An earnings slowdown will be the catalyst for wider spreads,” Peter Cecchini, the global chief market strategist at Cantor Fitzgerald LP wrote this week. “And we expect earnings to decelerate further in Q3.”