In a dramatic reversal to market sentiment that JPM’s head quant could only ascribe to even more “fake news“, SocGen’s Kit Juckes writes this morning that “a week ago, market sentiment was optimistic after the G20 meetings in Buenos Aires. That’s a reminder not to read TOO much into Monday morning markets!”
Picking up on this, another SocGen strategist, Andrew Lapthorne, writes that “having bounced back strongly post-Powell, equity markets slumped last week as the mood turned decisively bearish. MSCI World dropped 3.7%, leaving it 12.6% down from its late January peak.”
It gets worse: as Lapthorne adds, the DAX, China A, Emerging Markets and a host of other markets are now in bear market territory; must be all the fake news out there that is preventing JPM’s optimistic forecast from materializing. Putting the ongoing carnage in context, stock-wise 52% of MSCI World companies are down by more than 20% from their 52-week high, but only 38% of the market cap.
To make that point, Lapthorne notes the drawdown Basic Materials and Industrials sectors: they have already lost over 20% from their 2-year peak – in previous bear markets this usually bottomed out around 30% (GFC excluded). Meanwhile, in Europe, Basic Materials are down almost 30% and Industrials are off 26%. For a while now equity investors have been concerned about a whole gamut of macro issues; it was just the US equity market ignoring them until now, according to the SocGen strategist.
So strong the previous week, the US reversed those gains with the S&P 500 off 4.6%, Nasdaq down 4.9% and the Russell 2000 losing 5.6%, its sharpest weekly decline since the first week of 2016.
So what to do next? As we noted over the weekend, Goldman’s reco to clients was to rotate exposure, turn more cautious and allocate to stocks with a high sharpe ratio, those that offer a mix of both Growth and Value. Lapthorne has a slightly different take, and urges readers to shun anything with a growth/quality tilt and emphasize value. As he reminds readers, “we have spent most of the year worrying about the effects of higher US bond yields on equity markets, and, in particular, how that would affect expensive Quality and Growth stocks, and conversely how it might benefit ‘beaten-up’ Value stocks.”
Our aversion to expensive Growth and Quality stocks and our relatively sanguine view on global Value despite significant economic slowdown concerns, is that Value stocks and cyclicals more generally have spent much of the year pricing in a slowdown already.
So with the majority of world stocks now in a bear market, Lapthorne’s reco is simple: over the last few months, the slowdown has largely played out for Growth, but Quality has remained defensive and Quality Income (i.e., defensive with a high yield) has proved its relative worth during the sell-off.
Then again, as 2008 taught us, when faced with a liquidity crunch, asset managers will paradoxically hold on to their losers in hopes of getting better prices, while dumping winners. Which is why all those traders who have stocially waited for the past ten years for a renaissance in value stocks may finally enjoy a moment in the spotlight, only to suffer an even bigger hit in the coming months if the global economy is indeed about to sink into a market-crushing recession or worse.
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