Hirst: Markets Are Starting to Price Growth

Your Real Vision Daily Briefing for June 3, 2020

Ash Bennington and Roger Hirst discuss what returning to normal means for markets, the dollar smile, bonds, commercial real estate, and more.

  • Today we started to see a shift away from the old narrative of the NASDAQ outperforming everything else and toward the markets pricing growth.
  • If we want to see confidence really come back things need to broaden out; the recovery can’t continue to be concentrated in five stocks.
  • Current dollar weakness will likely be short-lived once the solvency crisis permeates the real economy and people start piling their money back into the U.S.

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There’s a lot going on in markets to keep our eyes on and today we started to see the markets pricing in growth, Roger Hirst said during the Real Vision Daily Briefing.

Hirst said we’re shifting from the old narrative of the NASDAQ outperforming everything else; we’re seeing Russell 2000 small caps outperforming large caps on the NASDAQ, we saw Europe outperforming the U.S., we saw bond yields moving, we’ve seen an extension of dollar weakness and euro strength, EMFX is doing well, and we’re 2% off in gold, which Hirst believes to be a reaction to real yields going higher.

“All of that is the market pricing in, ‘maybe we can return to growth,’ instead of, ‘we can only buy tech stocks,’” he said.

However, if we want to see confidence really come back, Hirst said things need to broaden out beyond the concentration of those tech stocks. That’s beginning to be unwound now but it’s a rotation because people think the worst is behind us because liquidity event has been solved, but there may be a solvency event coming.

Hirst said the worst case would be an expansion of zombie industries in large caps that can get their hands on liquidity while a significant number of mom and pop businesses, which are the economic growth engines, go bankrupt because they can’t get that liquidity.

“If you get that then future growth will be sluggish once again and the inequality gets worse,” Hirst said.

He also thinks that what happens with the dollar will be very important in terms of trying to evaluate where we’re headed from here.

He described the “dollar smile,” a metaphor where on one side you get dollar strength from problems in global markets such as low growth or the pandemic. On the other side is the U.S. dollar outperforming. In the middle low point is where we see dollar weakness, generally due to strength in other currencies because of coordinated global growth.

Hirst said we’re currently in that bottom part of the smile where there’s a shift away from the U.S. to other economies and other parts of the economy that are doing well, but he expects that we will again move to one or the other end of the smile when the real economy fallout happens (ie. the solvency issue) and people pile their money back into the U.S.

His forward outlook on the dollar: dollar strength versus the euro will remain.