Pro Perspectives 1/5/23

January 5, 2023

With a split Congress we should expect Capitol Hill to be noisy, but with little-to-no action.  The latter is what matters.  No action in DC is a positive for the economy and markets, following the reckless, and inflationary policy making of the past two years.

Ignore the noise.

The catalyst for global markets and economies continues to be interest rates.

And as we discussed yesterday, we should see a much slower rate-of-change in interest rates in the U.S., relative to last year (maybe zero rate of change).  And with that, we should expect the interest rate differential between the U.S. and much of the rest of the world, to narrow (as other major central banks play catch up to the Fed’s moves of the past year).

A faster rate of change in foreign interest rates, relative to the U.S., means money will move out of the dollar (weaker dollar).

For those searching the world for value, with a catalyst, it can be found in emerging market Asia.  If history is our guide, this is likely where we will see the best stock market performance in the world over the next few years.

As of October of last year, Morgan Stanley says the decline in the MSCI Emerging Markets index had exceeded the decline in the previous 10 bear markets, including the 1997 Asian Financial Crisis.  Stocks in Hong Kong have already jumped nearly 50% since (October).

And now we have a catalyst in China for the Asia trade, with the Chinese government scrapping its zero covid policy, AND stimulating (both fiscal and monetary).