An optimistic start to the week is under threat, while equity futures are tending lower. Some point to a leading regulatory official in China who warned of bubble formation in the US and European markets and elsewhere.
Whether you are restless or at ease, our call of the day, from Julien Bittel, multi-asset fund manager at Pictet Asset Management, now offers one-size-fits-all advice: diversify that portfolio.
Bittel’s concerns stem in part from what he says isn’t bad news anywhere at the moment. “Given the speculative extremes going on at the moment, we feel there could be a race to the exit similar to what we saw in 1987, where you know the market could drop by 30% quickly … over two months, ”he told MarketWatch in an interview.
In a chart storm, he goes through his view, starting with stock valuations, which he finds slightly pushed aside about depicting earnings “about to explode higher.” His chart below includes a series of valuation metrics that have been closely correlated with future returns since the early 1980s.
“What you can see here now is that at the current extreme valuation, this would suggest that the stock return will be about minus 29% year-on-year, 12 months ahead,” he said. Although the annualized return should be around 55% in March.
The following chart from Bittel shows a compound valuation score for stocks – currently in the 98th percentile. “So when it’s high, you know the valuations are very expensive,” he said. Another way of looking at it, “by this measure,” only 1.4% of the time in the last 40 years, stocks were that expensive. “
Rising bond yields, which stirred the financial markets, are the subject of the following chart. “Here is the 10Y-2Y US yield curve, it is currently 130 basis points from the lows of the curve inversion in August 2019,” said Bittel. An inversion refers to when longer maturities yield less than shorter maturities.
The last three times this happened was in August 1990, February 2001 and November 2007, and “historically, this degree of steeper yield curve reversal has resulted in a tipping point for the stock markets,” he said.
The following shows a few more and shows the most overbought commodities since March 2008 (see 14-day relative strength index). For those assets to outperform, “the dollar must weaken further and global growth momentum must surprise positively,” he said.
But he thinks a stronger dollar could be the big surprise to investors this year. The map below follows an analog from the end of 2017 to 2018 and shows that “the train will officially leave the station in March.”
Finally, he’s concerned about this graph that shows the company’s CEOs the most confidence in 17 years. As in, they couldn’t get much more optimistic.
Two things he thinks are likely, but many investors aren’t: a stronger dollar by the end of the second quarter and global growth momentum that’s surprisingly down in the second half of 2021. “The real blind spot for me is the impact this could have on the reflation trade, ”he said.
So diversification is Bittel’s advice, through a multi-asset product offering stocks and bonds, which will benefit in times of surprising growth, but can also hedge against the bad things that happen.
The markets
Equity Futures ES00,
YM00,
NQ00,
slipping after Monday’s bullish session. European shares SXXP,
rose, while and Asian markets ended largely lower, following that bubble warning from Guo Shuqing, head of the China Banking and Insurance Regulatory Commission. Oil prices CL00,
be lower, the dollar DXY,
is higher, and bitcoin BTCUSD,
prices rise.
The buzz
Shares of retailer Target TGT,
rise after better-than-expected sales. In that same sector, shares of Kohl’s KSS,
crawling after the results. Information technology group Hewlett Packard Enterprises HPE,
reports after closing.
Shares of Zoom ZM,
rise, after the video communications group reported adjusted revenues nearly 10 times higher due to COVID-19-related pandemic-related demand for its services.
All American Apple AAPL,
stores are open for business for the first time in nearly a year.
A top World Health Organization official warned against declaring victory over the pandemic towards the end of this year. That’s because cases of coronavirus worldwide rose for the first time in seven weeks last week.
Random reads
Singer Taylor Swift is unhappy with Netflix’s NFLX,
“Ginny and Georgia.”
Twice fruit, three vegetables a day = longer life.
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