The big things you need to know: First, the S&P 500 is still trading as though it’s experiencing a growth scare, a framework that has been pointing to downside in the S&P 500 to ~3,850. Current trends in economic forecasts continue to support the idea that this is the right way to think about how far stocks should fall. Second, institutional investor sentiment has made significant progress catching down to retail investor sentiment, with overall US equity futures positioning among asset managers now below 2020 & Great Financial Crisis lows, and getting close to 2011 and 2015/2016 lows – something that makes the case for a bottoming in stocks relatively soon if recession fears can be kept at bay. Third, while valuations aren’t yet a reason to buy US equities on their own, they are no longer a problem for the market as a whole.
ppreciate your support in the:
Now, the details.
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Takeaway #1: The S&P 500 is still trading like we’re experiencing a growth scare.
growth scare (the declines of:
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time around matches the late:
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If 3,850 doesn’t hold, we think the equity market will be telling us that it’s starting to price in a recession. If that happens the key number to keep in mind is 3,200 which would represent a 32% drop from the January high – right in line with the average drawdown seen in past recessions.
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nother post GFC growth scare (:
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till slightly above trend for:
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US economic surprises remain in positive territory.
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High frequency economic indicators like dining, flying, back to work and same store sales remain stable.
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Freight rates have come down sharply from their highs.
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And inflation expectations are retreating. We don’t blame the stock market for wanting to see evidence of an unraveling before pricing it in, given how frequently the economy and US consumer have been more resilient than expected in recent years.
As for the Fed and the fear that they will tighten too aggressively, our economics team wrote last week that “It’s fair to wonder if the Fed will even get to neutral. We think Powell is growing worried about the degree to which the economy is going to slow.” More specifically, they think Powell’s dovish side is likely to re-emerge once the Fed starts to hear more about job losses.
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Takeaway #2: Institutional investor sentiment has made significant progress in catching down to retail investor sentiment.
In our last Spotlight, we noted that while retail investor bearishness on equities has been extreme, such that it has been sending a contrarian buy signal for the S&P 500, that simply hasn’t been the case for institutional investors. And it may have simply been that in order for the US equity market to find a bottom, institutional investors have needed to catch down to retail. Today, there’s been no meaningful change in the sentiment for retail investors, where net bearishness remains at the deepest levels we’ve seen since the Financial Crisis.
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onal positioning is now below:
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oning is now approaching GFC,:
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Importantly, Russell:
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Meanwhile Dow futures positioning has fallen a bit below its GFC lows on a notional basis.
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Elsewhere on the sentiment front, we are continuing to keep a close eye on the VIX and the equity put/call ratio, as well as crypto. On the VIX and equity put/call ratios, we continue to note that while they have been elevated they haven’t quite reached many of their post GFC peaks – perhaps arguing that institutional sentiment hasn’t fully unwound yet.
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On crypto, which we view as another barometer of sentiment that matters to stocks, we point out that bitcoin and the S&P 500 have been positively correlated in recent years for the most part. We also note that bitcoin tends to peak well ahead of the S&P 500, in effect serving as a leading indicator.
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Unfortunately, bitcoin doesn’t provide the same kind of long lead for stocks at the troughs. In addition to the trends in crypto, we’ll be keeping an eye on how the recent problems in crypto may have impacted consumer perceptions of wealth and possible reverberations in spending, as well as any impact on the labor market, either from job cuts or adding supply back to the labor force due to impacts on perceived wealth.
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trade war and tariffs back in:
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Wrapping up with Takeaway #3: Valuations are no longer a problem for the stock market.
One thing that emerged for the S&P 500 last week was that all three top-down versions of the S&P 500 P/E multiple that we track – the P/E against last year’s EPS, this year’s EPS, and next year’s EPS – moved to levels slightly below their long-term averages. Though the stock market doesn’t look deeply undervalued on a P/E basis yet, we think this is an important milestone nevertheless since it sends the message that stocks are no longer expensive and valuations are no longer a problem.
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stock) have returned to:
Overall, while downside risks haven’t evaporated, the preponderance of the evidence we’re looking at makes us comfortable doing some bargain hunting.
That’s all for now. Thanks for listening. And be sure to check out our sister podcast, RBC’s Industries in Motion, for sector specific thoughts from RBC’s team of equity analysts.
