Well, That Was a Month

April has finished and there were plenty of fools who got caught in a month of practical jokes. The dominant story was of course the announcements on trade policy from the world’s largest economy. Following Liberation Day, the US equity market experienced a sharp downturn, plummeting nearly 10% in the initial trading sessions. However, a strong recovery ensued, leaving the market down just over 1% by month's end, illustrating an "S&P 500 April rollercoaster."

S&P 500 April rollercoaster

Source – Bloomberg LP

Conversely, Australian equities fared considerably better, closing April 3.5% higher than March. The US market is 9% below its exuberant high set a couple of weeks after the Trump inauguration but the All Ords 200 is only down by 5%.  With the price action of April perhaps the old saying that markets rise when there are more buyers than sellers is the only way to explain this Aussie outperformance.

The bond market, however, presents a contrasting narrative. The likelihood of a 0.25% rate cut in early May is now fully priced in and this rate cut cycle is expected to get all the way to 2.8%. This marks a significant shift from just a month prior, when economic forecasts suggested rates would not fall below 3.3%. Not only has the rates market priced in short term lower rates, the 10-year Australian Government bond yield has also decreased by nearly 0.25% since the end of March.

Australian Yield Curve Now and Before the shenanigans

Source – Bloomberg LP

The dark green line is the current pricing but what is clear is that the likelihood of staying in a low rate environment for any extended period of time is low. Steep rate hikes are expected from 2027.

Bonds and Stocks seem to have filled out completely different answers to the “Where from Here?” questionnaire.

Australian CPI has finally dipped into the RBA’s target range on an annualised trimmed mean basis. The central bank uses that measure because it strips out unusual effects like the Federal Government electricity subsidy and focuses on the broader inflation pulse. Despite this positive development the market actually reduced the probability of a second rate cut in July. All this chopping and changing and counter intuitive price movements is manna from heaven for traders but leaves many investors perplexed. That being said, the weekend’s federal election is not going to materially affect the markets with the government being returned without any need to negotiate with minority groups at least in the lower house.

In the midst of this, the local securities regulator ASIC has been looking closely at how price movements are reflected to investors. APRA is also focusing on the exposure to non-traded asset in large superannuation funds. The financial press has devoted many column inches to private credit in particular.

The key difference between the more familiar asset classes and debt is of course that debt involves a person or entity owing you all your money back. That is not the case for the roller coaster asset classes (including fixed interest where the benchmark continually rolls to the next issuance).

During this alarmist phase, there has been relatively little focus on the Private Equity failures that generally come before any losses are felt in private debt. Perhaps the press (and investors) consider the all or nothing features of that asset class somehow less noteworthy than the occasional hiccups from lending money. Private Debt has been around since the first banks opened in the late 15th century and yet our collective familiarity is pretty low.

Adopting a medium-to long-term investment horizon allows for periods of volatility, such as in the one experienced in April and can probably expect for much of this Presidency. Return expectations include allowances for this kind of price action and yet investors are almost always unsettled. Some research suggests investors often sell assets in times of adverse market movements and miss the recovery. Sitting on your hands with a long-term view might be a better approach.

That can be cold comfort when owning assets whose prices rely on other people’s perception of value. The current focus on the growth of private debt where an investor is owed their money back plus interest as being somehow riskier that the core bond and equity markets seems to be more about lack of familiarity than true understanding of the risks involved.  We will continue to try to educate wherever we can.