Market volatility: Insights from Jurrien Timmer

Market chaos and political strategies

Timmer began by highlighting the chaotic nature of the current market environment. With only a few weeks into the new administration and the year, the markets have been inundated with a rapid and overwhelming flow of news. This, he suggests, is part of a deliberate strategy by the president to create a sense of chaos, keeping both adversaries and the market itself in a state of uncertainty. This strategy, Timmer notes, is akin to "four-dimensional chess," where the continuous stream of information makes it difficult to discern what is real and what is not.

Market reactions and investor sentiment

Despite the chaos, Timmer observes that the markets are in a holding pattern. Since the election, there has been a "buy the rumor, sell the news" mentality. Investors have been waiting for concrete news to make informed decisions, leading to a period of price discovery where the market is trying to figure out the true value of assets amidst the uncertainty.

He observed that 52% of stocks are above their 50-day moving average, and 62% are above their 200-day moving average. This indicates a lot of market churn, with no clear direction. He also pointed out that the equal-weighted index made its high in November and has been trading sideways since then.

On the positive side, political and economic shifts could lead to stronger global growth. For example, recent elections in Germany saw a shift from center-left to center-right, which might indicate a broader European realization of the need for faster growth and increased defense spending.

The role of financials and global rotation

Looking at leadership within the equity market Timmer points out that the financial sector have been performing well, driven by factors such as yield curve steepening and central banks' stances on interest rates. He highlights the strong performance of European banks and the potential for a global rotation, where non-U.S. markets, particularly in Europe, might outperform U.S. markets.

Timmer highlighted the performance of European stocks, noting that the MSCI Europe index is up 9% year-to-date, emerging markets are up 5-6%, and the S&P 500 is up 2.2%. He also mentioned that financials have been a standout sector, with good earnings and favorable conditions such as a steepening yield curve.

Geopolitical implications and market valuations

Timmer explains that the current administration's approach means that no status quo is safe. Everything, from geopolitical alliances to economic policies, is on the table for potential disruption. This uncertainty makes it challenging to determine how much of the geopolitical risk is priced into the market.

He argues that the U.S. valuation premium is justified by its higher earnings growth and the substantial return of earnings to investors through dividends and buybacks. However, he cautions that high starting valuations create a hurdle for long-term returns, suggesting that the next decade in the U.S. may be less robust compared to the last one.

Timmer discussed the potential impact of tariffs, noting that if they lead to a stagflation trade war, it could result in less growth and more inflation. He also pointed out that the U.S. dollar peaked on January 17th and has slightly declined since then, drawing parallels to the dollar's behavior in 2017.

The impact of a shifting world order

Timmer notes that the traditional model, where the U.S. consumer drives global demand and other countries recycle their trade surpluses into U.S. treasuries, could be upended. This disruption could lead to new forms of economic relationships and trade agreements.

In terms of specific regions, Timmer sees Europe as being in the "hot seat". The political and economic pressures on Europe to increase defense spending and shore up supply chains could drive significant changes. He also highlights the potential for rising supply in the oil and gas sector, which could impact global commodity markets.

Timmer referred to the "Mar-a-Lago Accord", which involves allies potentially paying for U.S. defense protection by trading their treasuries for ultra-long bonds. He noted that this administration is willing to disrupt the status quo, which could lead to significant changes in global economic relationships.

Conclusion: Earnings growth and market performance