Despite the recent modest drop in stocks, the S&P remains just shy of all time highs, and near valuations which according to Goldman are at nosebleed levels and which market participants recently admitted are the most overvalued since 2000. Furthermore, with the market seemingly finding itself painfully rangebound in a world where until recently volatility was non-existent, traders desperate for alpha, have been scrambling for a strategy that produces a steady stream of profits.
One such trade was proposed overnight by SocGen’s Andrew Lapthorne, who notes that “the only strategy to stand out this year is short-term (1 month) price reversal, which involves selling last month’s winner and buying the losers.”
Here is his overnight note, according to which “Outperformance of reversal strategies points to a market struggling for direction”
Equities experienced a bit of a speed bump last week when the S&P 500 fell by more than 1% for the first time since September. The language accompanying this “steep sell-off” was really quite over-the-top, but given that the S&P 500 has declined by 1% or more on just seven occasions over the past year (versus an average of 25 per year historically), perhaps there was a pent-up desire to open the bear’s dictionary, particularly with commentators now having long exhausted the thesaurus for variations on the word “complacent”.
There is plenty to be bearish about. Equity valuations are tortuously high, with median valuations in the US and Europe near or at record highs, particularly once debt is included (i.e. on a EV/EBITDA basis). We estimate the US to be 25-30% over-valued if we compare today’s EV/EBITDA of 13 times to the 20-year average of 10 times (charts and data available on request). And earnings momentum, whilst improving in Japan and OK in Europe, is struggling in the US (1.5% has been cut from the S&P 500’s 2017 EPS so far this year, and 5% from the Russell 2000 2017 estimates), and what positive EPS momentum there is, is largely coming from Basic Materials (i.e. commodities). Expensive valuations coupled with no meaningful pick-up so far in US EPS momentum (quite the contrary for US smallcaps in fact) – and the market is struggling to make headway.
This directional doubt is also visible across our factor indices, with this year’s lack of performance dispersion across styles a complete contrast with last year’s volatility. Indeed the only strategy to stand out this year is short-term (1 month) price reversal, which involves selling last month’s winner and buying the losers.
Since November 2007, the Federal Open Market Committee (FOMC) has regularly published participants’ qualitative assessments of the uncertainty attending their individual forecasts of real activity and inflation
This paper documents how these benchmarks are constructed and discusses some of their properties
What Are the Lessons People Often Learn Too Late in Life?
1. Time passes much more quickly than you realize.
2. If you don’t take care of your body early then it won’t take care of you later. Your world becomes smaller each day as you lose mobility, continence and sight.
3. Sex and beauty may fade, but intimacy and friendship only grow.
4. People are far more important than any other thing in your life. No hobby, interest, book, work is going to be as important to you as the people you spend time with as you get older.
5. Money talks. It says “Goodbye.” If you don’t plan your finances for later in life, you’ll wish you had.
6. Any seeds you planted in the past, either good or bad, will begin to bear fruit and affect the quality of your life as you get older — for better or worse.
7. Jealousy is a wasted emotion. People you hate are going to succeed. People you like are going to sometimes do better than you did. Kids are going to be smarter and quicker than you are. Accept it with grace.
8. That big house you had to have becomes a bigger and bigger burden, even as the mortgage gets smaller. The cleaning, the maintenance, the stairs — all of it. Don’t let your possessions own you.
9. You will badly regret the things you didn’t dofar more than the things you did that were “wrong” — the girl you didn’t kiss, the trip you didn’t take, the project you kept putting off, the time you could have helped someone. If you get the chance — do it. You may never get the chance again.
Investors will confront excessive debt, high P/E levels and political uncertainty as they enter the Trump presidential era. In response, according to Jeffrey Gundlach, U.S.-centric portfolios should diversify globally.
Gundlach is the founder and chief investment officer of Los Angeles-based DoubleLine Capital, a leading provider of fixed-income mutual funds and ETFs. He spoke to investors via a conference call on January 10. Slides from that presentation are available here. This webinar was his annual forecast for the global markets and economies for 2017.
Before we look at his 2017 predictions, let’s review his forecasts from a year ago. His two highest conviction forecasts were that the Fed would not raise rates more than once, despite the Fed’s own predictions, and that Trump would win the presidency. Both predictions were accurate.
But he was also downbeat on emerging markets, and singled out Brazil and Shanghai as likely underperformers. Brazil turned out to be the best-performing emerging market last year, gaining 69.1%, but he was correct about Shanghai, which was the worst performing market, losing 16.5%.
Gundlach said he had a “low conviction” prediction that the yield on the 10-year Treasury would break to the upside. It began 2016 at 2.11% and ended at 2.45%. He said the probability was that U.S. equities would decline in 2016, yet the markets gained approximately 13%. Gold, he said, would hit $1,400 at some point in 2016. It began the year at approximately $1,100, hit a high of $1,365 during the summer and closed at approximately $1,150.
There is never as much detail or conviction in the Minutes as market-watchers hope for. This is the closest thing there is to guidance:
“At this meeting, members continued to expect that, with gradual adjustments in the stance of monetary policy, inflation would rise to the Committee’s 2 percent objective over the medium term as the transitory effects of past declines in energy prices and non-energy import prices dissipated and the labor market strengthened further. This view was reinforced by the rise in inflation in recent months and by recent increases in inflation compensation. Against this backdrop and in light of the current shortfall in inflation from 2 percent, members agreed that they would continue to closely monitor actual and expected progress toward the Committee’s inflation goal.”
The knee-jerk reaction in the FX market was disappointment and the US dollar fell 30 pips but it quickly rebounded back to unchanged.
Details of the December 2016 ECB governing council meeting 8 December 2016
Main refi rate 0.0%
Dep rate -0.4%
Marginal lending facility 0.25%
QE kept at €80bn until April 2017 then will continue at €60bn until the end of Dec 2017, or beyond if necessary
Will comment further at the presser
Monetary Policy Decisions
8 December 2016
At today’s meeting the Governing Council of the ECB decided that the interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will remain unchanged at 0.00%, 0.25% and -0.40% respectively. The Governing Council continues to expect the key ECB interest rates to remain at present or lower levels for an extended period of time, and well past the horizon of the net asset purchases.
It is probably a coincidence that one day after we commented on what is emerging as “the market’s next headache”, namely China’s (not so) stealth tightening, which in the last few weeks has led to a creep higher across the curve, the yield on China’s sovereign 10Y bond jumped 6.5bps to 2.94% on what Bloomberg dubbed were “liquidity fears.” This was the biggest one day spike for the benchmark bond since Jan. 25, according to ChinaBond data.
As a result of the selloff, the most actively traded 10-year govt bond futures were down 0.72%, while five-year futures dropped 0.74%.
The tightening was broad-based, with 1-year rate swaps rising 13bps to 19-month high at 3.17%; additionally the overnight repo rate also rose to 2.31%, the highest level this month.
Quoted by Bloomberg, Wu Sijie, bond trader at China Merchants Bank said “tightening interbank liquidity and the expectation of even higher short-term borrowing costs are driving up swap costs and affecting sentiment on the cash bond market.”
Meanwhile, signalling no change at all in its posture, overnight the PBOC drained funds in open-market operations for the fourth consecutive day, bringing the total withdrawal to 130 billion yuan.