That uneasy feeling when everything is going well. Is it deserved? Can it last? Should you cash in and go paint watercolours in that studio on the Pembrokeshire coast?
Strategists are not immune, with a summer bout of the temporaries upon us. Goldman is the latest, downgrading its view of stocks over the weekend but without really committing to it:
We also downgrade equities to neutral over 3 months. We are concerned that a sell-off in government bonds will lead to a temporary sell-off in equities in line with what we saw last summer, though the magnitude is likely to be smaller as the need for bond yields to correct is lower than it was back then.
A counterpoint to worries about the stuffy air of silence settling on markets arrives from Citi. Fear not the market calm, it is an unreliable sign of things to come.
There is little relationship between market volatility and future equity returns over any time horizon. Current low levels should not be seen as a clear sign of investor complacency and an imminent market correction.
Pickers of stocks cannot relax, however, because while market level volatility is low, it turns out that “style volatility” is up. Read more
We’ll see your bullish forecast, and we’ll raise you, Brian.
That’s Brian Belski, the BMO strategist who thinks that 10 per cent annual returns for the next decade are plausible for the US stock market. Read more
A quiet reformation continues.
One of the central articles of investing religion — that a forward price earnings ratio is a useful indicator of stock market value — is under sustained intellectual assault. Read more
From JP Morgan Asset Management. Tantalisation comes from the end of the black line, which you will note has perked.
This is an abridged version of a post by Andrew Smithers for his FT blog, one that lays out why using next year’s PE ratio to value the stock market is absurd. Taking the Fed Chair to task for her language, it is also ripost to the critique of long term valuation measures we have also featured.
Janet Yellen, the Fed’s head, rather bizarrely used the prospective price/earnings ratio, one of the weakest of all measures, to justify a statement that Wall Street was not overvalued. (This was doubly strange since her husband, George Akerlof, co-wrote a book with Robert Shiller, who has championed a much better measure…
I quote from a recent Buttonwood column in The Economist. Calling Ms Yellen’s comment “strange” seems very kind. Many people would rate the use of bad data in preference to better as irresponsible rather than strange, particularly when it carries with it the authority of the US Federal Reserve. Read more
One day, maybe, companies in Europe will stun those paid to forecast these sort of things with an explosion of profitability. The gusher of earnings will arrive to justify the steady rise in the valuations of companies expected to produce them.
For now though, the story is the same as it has been since 2010: negative revisions. According to the strategy team at Goldman Sachs, what had been hoped for this year was 13 per cent growth in profits, but six months in that has dropped to 7 per cent with the cuts broad based. Actual growth in reported earnings was 1.5 per cent in the first quarter, compared to that which preceded it.
There is hope, or at least explanation, however. It was ever thus: Read more
We detect a theme. It may be that with financial markets becalmed a new subject is needed. Perhaps it reflects the way Piketty has become an instant bookshop-to-shelf classic, but something has investment strategists reaching for insight from an eighth century theologian.
“And those people should not be listened to who keep saying the voice of the people is the voice of God, since the riotousness of the crowd is very close to madness.” — Alcuin to Charlemagne, 798 A.D. Read more
To take a tiny bite of a very large subject, what is the ideal asset allocation for a long-term minded investor?
Providing an answer has made a lot of people a lot of money over the years, typically when couched as a response to another unanswerable: how much risk to you want to take? (Er, a bit, but not too much. What do most people do?)
The typical answer that is sold, however, has changed over time as well. Read more
Welcome to boom time in the UK. There, we said it. Or rather we’ve spotted that the optimistic Jonathan Stubbs at Citi has said it. There is a buzz, and it is all about the Bs.
Bull Market — Boom, Bids, Base Rates, Builders & Big-Caps
Global recovery, UK boom — Our economists expect progressive recovery of global economy in 2014-15 with GDP growth of 3.1% this year rising to 3.5% in 2015, from 2.5%in 2013. Recovery led by US and Europe/UK. EM headwinds not strong enough to derail growth. UK survey data very strong, eg new orders, hiring and investing intention. Boom time.
Further evidence arrives that if you are looking for value stocks in these markets, then you are going to have a tough time of it.
Millennial Invest has charted the change in the dispersion of valuations over the last five years for the US market. What he finds is that it is not just the average valuation that rose in the long post crisis bull market, but the range of valuations has narrowed as well as the market has become much more homogenous.
What he looks at is something called the Ebitda yield. Read more
If we know one thing about investing, it’s that time and the power of compounding make stocks an essential holding for savers, right?
Well, maybe not, at least when the choice is to hold bonds with a reasonable yield instead and the excess returns from stocks have been on a long term downward trend, something suggested by this presentation from Claude Erb, the West Coast based manager of TR.
Which is going to take us on a mostly chart based and, we hope, relatively painless tour of a wonky concept — the equity risk premium. But it’s also a way to come at those arguments about long term measures of stock market valuation, the Cape ratio and Shiller PE, from another direction. Read more
Tech is down, Treasuries are up, stocks are flattish: whatever happened to asset rotation, great or otherwise?
For an answer, we turn to the flows as interpreted by Nikolaos Panigirtzoglou and team at JP Morgan, who have found that the bond selling of late last year has reversed:
non-bank investors appear to be responsible for most of this year’s bond rally of which retail investors were one. Neither speculative investors, who appeared to have increased their US rate shorts by $110bn duration-weighted YTD, nor banks who, driven by FX managers, sold USTs this year, appear to have caused this year’s bond rally.
About that European bull market. Enthusiasm is there, but the earnings not so much yet.
With little support from earnings, European equities continue to be re-rated in P/E and price/book terms. From 10x in late 2011 to 17x now, European equities trade above both post-1980 and post-1990 average P/Es.
Citi strategist Jonathan Stubbs finds that it’s not just the average, value stocks no longer offer great value either. So, look for places where corporate earnings are actually, y’know, growing. Read more
So, havens were what worked in the first quarter, led by a niche precious metal.
Double double, toil and trouble…
Morgan Stanley’s US quant team has an eye on the market cauldron, and the simmering has a late nineties feel to it: Read more
Big declines for the Japanese benchmarks, with the Nikkei 225 rapidly approaching 14,000 from the wrong direction to leave it and the broader Topix firmly in correction territory.
There are reasons aplenty. Japan vied with Portugal for most go-go market last year, Chinese growth appears to be slowing, the US had a bad day, and then there is the whole taper-related, Turkey-inspired return of general angst.
Still, momentum watchers may have reason to be concerned by the following chart: Read more
So yes, the Cape measure of long term valuation might have some flaws, but don’t expect them to keep a good bear down. The latest from Andrew Smithers provides some more (over) valuation points to chew on. Read more
Pop quiz – what was the price earnings ratio for the UK benchmark at its previous peak of 6,722 in October 2007?
We ask because the FTSE 100, now slightly higher, is near as dammit at the same valuation once again. But the real surprise is perhaps the lowly level of that ratio. Read more
A new year is a new country, so far as the investment prognostication world is concerned. What will people do with their clean slates, we wonder?
Buy equities is a strong contender. It appears to be what retail investors finally did last year after years of revealing their preference for bonds, and they aren’t done yet. If you don’t believe us, well, we have charts… Read more
With thanks to the eagle eyed Tracy Alloway, the year in asset class returns illustrated in shades of Deutsche Bank blue.
(Spoiler: not such a good year for gold, commodities, or A-Rod baseball cards). Read more
This bull train is ready to blow off some steam, maybe.
Seeing as we can’t remember if good news is still good news, or if it counts as bad news these days, why not throw some technical thoughts into the mix. GaveKal’s Jean-Yeves Dumont has his finger on the sell trigger: Read more
Sounds impressive, doesn’t it — more than $100bn in investor money has sploshed over to the US stock market since the start of 2013, according to EPFR and BNP Paribas:
Better news out of Europe sparked a rally in growth-focused assets as trading started to thin ahead of the holiday season, reports the FT. The FTSE All-World equity index was up about 2 per cent, with risk appetite building as shown by a 0.9 per cent fall for the dollar index and sturdy buying in the commodity space, where copper was up 2 per cent to $3.37 a pound. Gold, which has been trading of late with a close correlation to stocks, rose over 1 per cent to $1,613 an ounce. Much was made of the bullion’s drop below the 200-day moving average last week, so traders are eyeing that technical indicator again as it now becomes potential resistance at $1,621. Wall Street’s S&P 500 rebounded and jumped over 3 per cent, more than overcoming Monday’s losses, which came after Bank of America’s share price slipped below $5 for the first time this year, triggering heavy selling of financials. A report on Tuesday that showed US home building starts at a one-and-a-half year high in November added to evidence the struggling housing market may be gaining traction, further buoying investors. The mood was calmer early on in the session, with Asian markets recouping some of Monday’s losses as tensions surrounding the transition of power in North Korea eased a touch. Sentiment also improved in Europe after the Ifo survey of German business confidence defied the gloom-mongers by rising sharply in December. This was followed by a well-received €5.6bn auction of Spanish short-term debt, which reduced fears about sovereign funding difficulties across the eurozone.
Market schizophrenia alert. The Monti put that might have triggered the Italian bond rally today seems to have inspired a rally in global stocks. Who knows how long this will last. And maybe that’s the point — it’s a game of gambling on possible outcomes rather than fundamental investing at this stage.
That’s the seemingly obvious point that’s worth stating from Mark Dow, portfolio manager at Pharo Management, a New York-based hedge fund. The Pharo investor is a former economist at the IMF and the US Treasury so his macro intuitions are
scary worthy of note. Dow told FT Alphaville this week that he is grappling with the challenge of expressing a bearish position across asset classes in a market that boasts some positive technicals but lacks meaningful direction for now. Read more
The ebullience of recent sessions was subsiding as traders took stock ahead of further developments on the eurozone fiscal crisis and the start of the US third-quarter earnings season, the FT reported. The FTSE All-World equity index was up 0.4 per cent, supported by a 2 per cent jump in Tokyo, which was playing catch-up after Monday’s holiday, during which time global risk assets enjoyed one of their strongest days for some while. The FTSE Eurofirst was down fractionally and S&P 500 futures pointed to Wall Street dipping just 0.1 per cent at the open. The US benchmark jumped 3.4 per cent on Monday, taking its gains since last Tuesday’s intraday low to 11.2 per cent. The rally came partly as a result of dwindling concerns over the health of the world’s biggest economy, after better-than-expected US jobs numbers on Friday finished topped off several examples of forecast-beating macroeconomic data. But the main impetus behind the surge is, arguably, raised hopes that the European authorities will manage to create a grand plan for the bloc that by recapitalising the region’s banks, may allow for a managed Greek default and thus contain sovereign debt contagion and restore confidence in the euro project.
Tuesday 21.30 BST. Wall Street has averted entering an official bear market with a stunning late rally of more than 4 per cent in the S&P 500, after the FT reported that European Union finance ministers are examining ways of co-ordinating recapitalisations of financial institutions. In the final 45 minutes of trading, the S&P rebounded from a loss of 1.8 per cent to close up 2.3 per cent at 1,123.94. Bank stocks led the rebound with the S&P financials index rising 4.1 per cent and reversing an early drop of 2.9 per cent. That helped the S&P avoid closing down more than 20 per cent from its April high, which is the threshold for a bear market. “Positive European headlines have been few and far between, and, ultimately, today’s rally was spurred by a headline and not the actual implementation of a policy decision,” said Dan Greenhaus, chief global strategist at BTIG. Such doubt is echoed across other markets, as the dollar and Treasury bonds were hit by late selling pressure as stocks surged. However, many strategists were sceptical that a turning point had been reached, especially as the surge in optimism drowned out other worrying news, namely a three-notch downgrade of Italy’s sovereign credit rating to Aa2.
OK, volumes are seriously low and it’s Labor Day in the States. On the other hand…
Monday’s WSJ gives lengthy treatment to the scramble among analysts to work out whether stocks are cheap considering the uncertainty about the path of US corporate earnings.
There’s plenty of disagreement among the sell-siders and cheapness is itself a hazy concept. Using the Shiller-based P/E ratio of comparing prices against historical earnings going back ten years, stocks would appear to be, if not too expensive, then nothing like a bargain either. But shift to projected earnings and ratios still look mighty appetising — though of course, much will depend on whether the “projected” bit turns out to be accurate. Read more