This edition of Market Factors begins with a concept that’s been on my mind for a while - whether we’ll be intellectually and emotionally prepared for a long-term value market when it gets here. Section two describes a Citi report outlining market “wildcards” that could screw up portfolios in the coming year and the diversion outlines a new terrifying biotechnology.

“Buy low, sell high” has been the investing cliche since the dawn of time but it hasn’t worked for at least a decade. Instead, “buy high, sell higher” has been the path to riches as the winners kept on winning. Until last month.

I am not declaring that a new value market is underway although that is possible based on the current market backdrop. What I am suggesting is that few of us will be mentally prepared when the value market comes.

Since September 2010 when the Vanguard Russell 1000 growth and value ETFs became available, the cumulative 781 per cent cumulative return for the growth index crushed the 281 per cent cumulative return for the value index. There were few periods, even shorter time frames like 12 months, when the value index beat growth.

February market returns did not follow the same pattern. BofA Securities chief U.S. quant and equity strategist Savita Subramanian emphasized that the Russell 1000 value index outperformed the growth index by 6.0 percentage points (2.6 per cent versus -3.4 per cent), a significant margin. High cash flow yield was the best performing market factor.

Utilities, energy and materials were the top performing U.S sectors for the month while consumer discretionary (dominated by Amazon.com and Tesla Inc.), communication services (Alphabet Inc. and Meta Platforms are the biggest companies in this subindex) and technology were the laggards.

U.S. and global manufacturing data will be a key determinant of growth versus value returns. Even in services dominated developed economies, manufacturing activity is more sensitive to changes in the economic cycle and therefore can signal changes in equity market leadership.

Another BofA strategist, Irina Shaorshadze, highlighted an improving ISM Manufacturing survey (of U.S. activity), led by the forward-looking new orders component.

Value investors outperform during sustained periods of accelerating economic activity. More stocks generate strong earnings growth and fund managers can buy strong profit growth for low valuation levels. When the economy is sluggish, the best investment performance comes from paying high valuation levels for the few companies generating outsized profits.

I believe, as investors, we have become accustomed to technology stocks leading the market. It makes intuitive sense when new software and technology increasingly invade our business and personal lives.

But what if grimy old economy stocks begin to outperform? Will we be mentally ready to make the switch in our portfolios? Will investors be willing to sell Meta Platforms, which is down 9.7 per cent since its January high, to buy Houston-based chemical products providers Westlake Corp, up 82 per cent since the end of November?

It will take time, I think. It’s been so long since investors were rewarded for trawling through the indexes looking for beaten down, cheap stocks that they are out of practice. It might be time to start getting used to the idea.

Citi put a marketing push behind a report featuring over 20 analysts detailing potential outlier events that could completely upend global markets. They emphasize that none of the scenarios is a base case but they are likely enough for investor consideration. The report is called “Wildcards: Tail Risks in an increasingly Fragile World”.

There are nine wildcards: global fragmentation, the narrative of the foreign buyer strike of U.S. Treasuries, faster pace of renminbi appreciation, Monroe Doctrine extreme, U.S.-Iran War or Iranian civil conflict (now unfolding, obviously), the end of the yen carry trade triggering structural trade unwinds, a bursting AI bubble, AI hits credit and EU exceptionalism.

The first four are trade-related and involve the changing relationship between the U.S. and the world (that’s the most charitable way I can describe it). A lack of foreign buyers for Treasuries would, of course, cause a U.S. economic catastrophe of spiking bond yields and sharply lower equities and currency.

The AI bubble bursting and AI-related credit issues have been covered before in Market Factors and I doubt European equities are of much interest to Canadian investors, at least so far.

The unwinding of the Japanese carry trade - the boogeyman under the bed for global investors for decades - is the one that interests me most. Citi analyst Osamu Takashima thinks rising Japanese bond yields could push the yen much higher. This would force speculative investors that have borrowed money in yen to buy U.S. and other Western assets to sell the assets and pay back the loan.

The scale of the yen carry trade is difficult to gauge and the source of apocalyptic guesses. Citi estimates the total at around ¥1,500-trillion or just under US$9.5-trillion. A sell-off on that scale would be problematic to say the least.

Australian biotech company Cortical Labs has taken 800,000 human brain cells and taught it to play the early shooter video game Doom. Cortical’s chief scientific officer Brett Kagan had previously marveled at the mini-brain’s ability to teach itself, in minutes, how to play the simpler video game Pong.

I have concerns, and not just about where they’re sourcing these brain cells. It only took 18 months between teaching the clump of cells how to play Pong and how to play the much more complicated, three dimensional game Doom. That seems an exponential pace of development and I wonder where it’s leading.

There are worlds in which these artificial-except-real brains displaces CRSPR as the most terrifying technology humankind has developed since nuclear fission.

My apocalyptic brain once again, just like with CRSPR, runs directly towards perverse military uses. With CRSPR it’s the development of Captain America through genetic manipulation and with this it’s weapon systems directed by actual human neurons.

I don’t think the Apple A19 semiconductors currently running iPhones will be replaced by human brain cells anytime soon but Cortical Labs’ remarkable research makes it very easy to imagine.

More details from Futurism here.

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U.S. markets are broadening out beyond mega cap technology, as Scotiabank strategist Hugo Ste-Marie, among others, has noted. It is the type of market where active managers outperform - the giant tech companies are losing momentum but still dominate index returns, allowing smaller companies to outperform the benchmark. The mutual fund industry will no doubt start advertising this fact heavily but it remains the case that passive investing outperforms over the longer term.

BofA Securities foreign exchange analysts expect the loonie to significantly outperform the euro on the back of rising crude prices. This is based on the Iran conflict so it might not last long. Specifically, they recommend shorting the EURCAD cross rate.

I was taught to watch the KOSPI index by then-Merrill Lynch chief U.S. equity strategist Richard Bernstein. South Korean equities were highly correlated with metals prices and global manufacturing activity. The KOSPI and metals prices have diverged recently and when I noted this on social media, CNBC’s Michael Santoli helpfully suggested that the benchmark is much less useful now because it’s dominated by tech giants Samsung and SK Hynix. These tech stocks are AI plays and less indicative of global growth.

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