George Herman 
Chief Investment Officer


The binary market reactions continue with a quarter that contained a horribly negative May, followed by a record positive June. Once again, if you returned from a period of non-connectivity, the overall asset market returns look absolutely healthy and, in fact, quite pleasing. 


So what’s the problem? To begin to answer this, let’s first take a look at the numbers:



A unique record was achieved during 2018 where no single asset class outperformed cash for the year. Now, with just half of 2019 behind us, we’re experiencing the exact opposite: Every single asset class in the world is outperforming cash, and handsomely too.


Let’s consider what’s changed and what hasn’t:

The outlook for interest rates in the United States (US) and the forward guidance of the US Federal Reserve.


The Fed was still quite hawkish in December 2018 when interest rates were increased, in line with long-term guidance. The Fed’s language became more dovish in January 2019 and all global central banks have since become more accommodative in their policy stance. Markets took cheer from this change in sentiment and now view the Fed-Put (referring to the monetary policy put in place by former Fed chairman Alan Greenspan and knowns as the “Greenspan put”) to be back in place. This view states that should the central bank be in a bind, and should economic numbers be weak, then the Fed will be forced to lower interest rates and, in so doing, protect the downside for risk markets. Market sentiment has become very buoyant right now as forward markets price in several rate cuts in the US, going into 2020. This is a huge turnaround in sentiment from the end of 2018 and a major driver of the risk-on sentiment.

Global economic growth has been slowing since the latter part of 2018 into the first half of 2019.


This heightened the fear of a possible recession, which caused most of the negative market movement we’ve experienced over the past six months. It’s already clear that China is adding stimulus to its economy and that supports emerging markets and commodities in general. The US is also still growing around 3% with less risk of a recession than at the end of last year, thanks to a dovish Fed.

Different asset classes are giving different signals and peculiar investor action is raising many questions.


It’s rare that growth assets and safe-haven assets rally at the same time. Not impossible, but rare. After all, why would investors buy growth stocks and safe-havens at the same time? If they were uncertain, they’d buy defensives, but buying cyclicals and safe-havens, well, that’s rare. Look at emerging market equities, which are up 10.6% year to date. That’s a great performance for a high-risk growth asset class over just six months. At the same time, emerging market bonds are also up 10.6% year to date. That is an astounding return for an asset class that should do well when growth is robust and the US dollar weak, neither of which was particularly true at this juncture. Gold is also up 10.2% during the first six months of the year, reflecting growing political unease and global tensions. It is a very interesting, therefore, that developed market equities are up 17% at the same time.

Whenever bonds and equities perform strongly at the same time, you must question the underlying drivers and decide which you believe to be the strongest.


Robust growth and earnings growth, feeding the risk-on trade, should support equities, while slowing growth and lower inflation should feed the risk-off trade and support bonds. So, in order for the markets to drive both asset classes up simultaneously, they have to place all their faith in the central banks to positively skew financial market outcomes by lowering rates into any economic difficulty. However, this “guarantee” shouldn’t be seen as all-encompassing or long lasting.

With all asset classes freshly inflated by central bank octane, we can expect volatility to remain.


The S&P Index has recorded an absolute monthly average move over the past 10 years of 3.06%. Over the past six months, that average has been 5.66%, highlighting the severity of the dislocations. 

The tariff or trade “war” between US President Donald Trump and China.


The news on this particular theme changes constantly. Overall it places a damper on global growth and imputes uncertainty into existing trade relationships. In the shorter term, however, messages from either side effects the market’s assessment of the risk impact of this rolling dynamic. Most recently Trump and his Chinese counterpart Xi Jinping exchanged pleasantries at the G20 meeting, overshadowing the overall message of the gathering. They agreed to resume talks on further tariffs and both showed some willingness to concede, while both reiterated their prerequisites for a satisfactory trade deal. In essence they’ve kicked the can down the road, leaving the markets none the wiser, yet more positive about an amicable settlement being on the horizon. President Trump is dribbling this issue right up to re-election time.


At Citadel Asset Management, one of the pillars of our investment philosophy is that the future is uncertain and it’s bound to surprise. This is no blanket excuse, but rather a reminder to create solutions that can withstand volatility by including different sources of return within our portfolios. This philosophy and process has served us well during these very uncertain times, which certainly cause exaggerated binary market movements. We keep our eye on the ball by remaining focused on the medium-term underlying fundamentals of the markets and by not getting overwhelmed by short-term “noise” and presidential decrees. 

A recent study published by the School of Economics at the University of Cape Town, titled: Analysis of Media 24’s “Economist of the Year” forecasting competition, analysed the accuracy of forecasts done by South African economists since 1998. The authors aimed to show how accurate forecasts can be and by what degree they err when they do. It is a most insightful paper and one of the interesting findings was that the consensus (average) forecast of all the entrants, ended up being the ‘best’ forecaster. Another interesting fact from the paper is that Citadel was the highest ranked institutional participant for overall forecasting performance. This is a testament to the robust process designed and curated by dedicated people, over the past 25 years. It is exactly this macro-economic framework that sets the scene for our entire investment process at Citadel.

I hope you enjoy this edition of the CITATION.

George Herman  

Chief Investment Officer: Citadel Asset Management
July 2019


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