MacroResearchBoard

A Great Theme, But Stock Prices Are Overshooting – March 11, 2024

A just-published report updated our investment strategy, which has benefited considerably from the risk-on phase that developed last autumn. We added three new positions and tightened stops on some winning recommendations within the MRB TradeBook.

Equities and other risk assets have rallied because investors realized that they were too cautious on expectations for a soft-landing in the U.S. economy. Renewed headwinds will return once bond investors realize that inflation is not returning to near 2% and bond yields rebound.

An additional concern is that the dramatic rally in a small number of U.S. mega-cap technology-related stocks has significantly concentrated the risks. The euphoria has some similarities with the late-1990s, and we expect that today’s favored stocks will eventually find it difficult to hit very elevated multi-year earnings expectations. History shows that good themes do not always make good investments, once prices become too stretched.

The investment implication is that increased diversification to other parts of the U.S. and global equity market will become increasingly prudent.