One week / one topic: War is peace

What happened?

Apparently, the US and Iran have agreed a peace deal to reopen the Strait of Hormuz.

While we have had many false dawns before – and things might well change between now and when you read this – there are still important takeaways.

As far as we can tell, oil tankers traffic essentially ground to a halt since the start of the war.

And yet, returns since the first attacks paint a confusing picture, to say the least.

Growth assets like equities have performed well, with pockets of remarkable strength in Tech and its various expressions.

Oil is 30% higher than before the attacks, but none of the doom-and-gloom predictions have actually come to pass (so far!) thanks to demand destruction and destocking.

So-called ‘safe havens’ like gold and US Treasuries underperformed, likely because of forced liquidations and inflationary concerns respectively.

Ultimately, what we are left with is either more confusion as to why things didn’t behave as the textbook would prescribe – or vindication for those who maintain that we live in a very different world vs only a few years ago.

(Full disclosure: I sympathize with the latter camp.)

After all, equities have in short succession overcome concerns about war, oil supply disruption, higher inflation and ballooning issuance – all on the backdrop of already extended valuations.

While it’s self-indulgent to scream “This makes no sense!”, we should also entertain the possibility that accepting reality for what it is might be a healthier option?

After all – given the extremely concentrated ownership of US equities, which remain the largest game in town – household sponsorship is unlikely to abate, as long as the top echelon keeps doing just fine.

Meanwhile – fittingly, perhaps – we can console ourselves with space dreams, as the SpaceX IPO was more than four times oversubscribed on Thursday.

Is this all starting to feel like a market top, or – on the contrary – like a picture of resilience?

Our observations

• Fundamentals: As recently stated, it should matter a lot that the largest companies on Earth are quickly turning from share cannibals (buybacks) to profligate issuers of debt and equity.

  Alternatively, this is just the latest iteration of the proverbial wall of worry for equities. Institutions have remained skeptical, and they might indeed be forced to chase this into higher levels.

• Price action: The undeniably high dispersion of returns that we are witnessing speaks of a discerning market, and not one that is bidding everything higher no matter what.

  This is an important argument against this being an obvious market top, and upcoming IPOs will give us further clues as to whether this is changing or not.

• Investor beliefs: To the moon… No, sorry: to Mars – that’s cooler.

  Also, Elon crossed the line and became the first ever trillionaire. ?!?

So what?

The full meaning of the “War is peace” slogan – from the indispensable Nineteen Eighty-Four novel by George Orwell – remains elusive.

Perhaps, though, it echoes with where markets are today – and how investors can hold two contradictory beliefs simultaneously and accept both.

Yes, there are undeniable sources of radical uncertainty which should curtail risk appetite: expensive valuations, technological disruption, war, inflationary pressure, exploding debt levels… and many more.

And yet, you can turn virtually every one of them into a bullish argument.

Expensive valuations? Passive investing and retail flows don’t care. Technological disruption? Look at that CapEx, man…! War? They’ve made a deal.

And so on… you get my drift.

Since price action commands respect, we ultimately remain constructive until proven wrong – and complement this with higher-than-usual vigilance and portfolio diversification.

Let’s just hope that we don’t reach the ‘2 + 2 = 5’ stage…

Mood music: Pink Floyd – Another Brick in the Wall, Pt. 2

By popular demand, here is the One week / One topic playlist

The information provided should not be considered a recommendation to purchase or sell any particular security.