Eq: Total Market
(New York)
Ray Dalio, one of the most famous hedge fund managers in the world, and the founder of the world’s largest hedge fund, Bridgewater, says that the world has lost its mind. The eccentric hedge fund founder recently published a blog post entitled “The World Has Gone Mad and the System Is Broken” in which he argues that zero rates, weak returns, and growing inequality are leading to something bad. What exactly that “bad” was remained unclear.
FINSUM: We agree that these are issues, but we are pretty tired of vague doom and gloom prognostications. We like a highly specific catalyst for such forecasts.
(New York)
In what comes as a very worrying announcement for investors, Goldman Sachs has just said that it may be time to cash out of equities. Goldman says that the current mass rotation out of equities and into bonds mirrors what happened before the Crisis. “Decelerating US economic growth, trade and geopolitical uncertainty, and near-record high starting equity allocations have likely contributed to the rotation from equities to bonds and cash this year”, says Goldman. Any steadiness in equities will probably just be artificial. “The peak in buyback activity arrived in 2018 after the Trump administration’s tax cut fueled a wave of repurchase programs. Buybacks are projected to fall 15% in 2019, and drop another 5% in the following year”, Goldman said.
FINSUM: In principle this seems like a sound assessment. The problem is that all the worries Goldman is citing have been on the table for a while and yet stocks have been rising.
(New York)
Stocks are in an interesting place right now. They are at all-time highs, but at the very same time, there are fears over the economy and trade war. Bearishness seems to be at a peak alongside the market. So what does all of this mean? It means that this may be an ideal environment for the market to keep rising. For those who adhere to the idea that the market loves to climb a wall of worry, there is a perfect wall to climb right now. According to Bespoke Investment Group “When the public has viewed a new high in the market with skepticism (more bears than bulls), the S&P has seen gains over the next year every single time”.
FINSUM: We think the market outlook appears better than worse at the moment. Even if the economy continues to weaken, as long as it does so at a slow and predictable pace, we don’t think there will necessarily be a bear market.
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(New York)
New US GDP data has been released and it is not good news. Though, it is isn’t exactly terrible either. US third quarter growth was 1.9%, the lowest level of 2019. The fall in pace was caused by a reduction in business investment. The pace of growth was 2.0% in the second quarter. The 1.9% rate actually exceeded estimates of 1.6% despite still being the weakest result of the year.
FINSUM: So the big question here is how the Fed will react to this news. They have generally had a glass-half-full approach, so this may keep them from proceeding with cuts, but we’d bet they undertake one more “insurance” cut.
(New York)
The market just hit fresh highs and we are making progress on the trade war; everything is good right? Wrong, says UBS. The bank has just put out an unusually bold warning, saying markets are likely headed for a big decline. Why? Earnings. Earnings growth forecasts for 2020 have tumbled from a peak of 23% to the just 1% now, a huge fall in expectations. That all comes as the growth backdrop for the economy is weakening, and signals that valuation multiples are likely to contract. “Every bear market of the past 50 years has witnessed an actual decline in S&P 500 forward earnings … Ultimately, the most vulnerable macro backdrop for equities occurs when forward earnings growth turns negative as LEIs are trending downward (pushing [price-to-earnings] lower)” says UBS.
FINSUM: An earnings bear market can easily turn into a real bear market, though it doesn’t always happen.
