Of all the questions thrown up by the rebound in risk appetite so far this year, at least one is easy: What’s winning?
Pretty much everything, that’s what.
The end of the first trading month of the year brought a surge in superlatives -- the biggest January gain for a gauge of global equities in at least 30 years; the S&P 500 Index’s best month since 2015; the strongest start for U.S. high-yield debt in a decade; the largest first-month jump for commodities since 2003.
The tough question is how long all this can last.
At first blush, the past five days have delivered something close to a Goldilocks scenario for investors. The U.S. jobs number was solid, but wage growth cooled. A gauge of American manufacturing rebounded, but not too much. Most important, the Federal Reserve was more dovish than expected -- with member James Bullard reckoning the shift away from rate hikes sets the economy up for “a very good couple of years.”
Yet late-cycle signs are everywhere, and after December’s near-death experience market signals conflict at every turn. It’s a big problem for investors -- especially those who missed the January melt-up.
“It’s too late to be super bullish, and too early to be super bearish,” said Sophie Huynh, a cross-asset strategist at Societe Generale in London, who has been warning of a late-cycle economy. “Investors will have to pick up opportunities where they can -- in value, in the euro zone and in emerging markets.”
They’d better be quick. Emerging-markets stocks surged 8.7 percent in January. European equities jumped 6.2 percent. U.S. value shares climbed 7.6 percent.
Plenty of people may have catching up to do. In the wake of the fourth-quarter rout, investors sought shelter in the money markets. Following six consecutive months of inflows through December, exchange-traded funds backed by short-dated securities hit the highest level since 2010 -- and it looks like plenty of capital is still there.
Unfortunately for them, cash was not a great place to be in January, and Bloomberg’s dollar spot index dropped 1.3 percent. Treasury bills were a laggard, only managing to eke out a 0.2 percent gain.