As most financial media will remind you, today is the 7 year anniversary of the market’s lows hit on March 9, 2009, a day when the Wall Street Journal wondered “How low can stocks go”, which took less than a week after Obama said on March 3 that “what you’re now seeing is profit-and-earning ratios are starting to get to the point where buying stocks is a potentially good deal if you’ve got a long-term perspective on it” (sic) and just days before the Fed officially launched its expanded QE1 asset purchasing program.
What took place since then has been the most remarkable, central-bank supported rally of risk assets in history, with the S&P rising some 200% to hit all time highs around 2,100 just one year ago, and restoring $14 trillion to stock values. In fact, the move since March 9, 2009 is now the third longest bullmarket in history, and just days away from being the second longest rally on record.
Now, as Bloomberg writes, “investors are awash in angst, showing little faith the run can continue. They worry about contracting corporate earnings, slowing Chinese growth and uncertainty over interest rates. And they’re walking the talk by pulling cash from stocks at almost the fastest rate on record. It’s not unwarranted – the S&P 500 has gained just 0.5 percent in the last 18 months.”
What Bloomberg is confused by is that despite this unprecedented rally, after a brief period of inflows in 2013 and 2014, investors have been pulling money out of stocks at a record pace, leading not only Bloomberg but many others to dub the move in the market as the “most-hated rally ever.” What Bloomberg fails to note is that as everyone else has been selling, corporations have unleashed the biggest debt-funded stock buyback spree in history, providing the natural offset to wholesale selling by virtually everyone else, and allowing the market to barely dip over the past year.
To be sure, what happens next is unknown; yesterday Jeff Gundlach said that at this point the most recent bear market rally, which has taken the S&P 10% from its recent lows, is over and the risk/return profile is abysmal, offering 10 points of downside for every 1 points of upside, and concluding his presentation by saying “I think we are near the end of a bear market rally with a 10:1 risk/reward ratio.”
Bloomberg promptly took the other side, and argued that just because the rally is hated, and the “wall of worry” is growing, the next big move is likely to the upside. To wit:
[W]hen people withdraw money, stocks inversely tend to rise later, according to data since 1984. In the 12 instances when funds experienced monthly outflows that were at least 2 standard deviations from the historic mean, the S&P 500 rose an average 7.1 percent six months later, compared with a normal return of 3.9 percent, data compiled by Bloomberg and Investment Company Institute show.
[Once] things start to turn around, bears will be forced to buy. From Feb. 11 through Monday, a Goldman Sachs Group Inc. index of the most-shorted companies outperformed the S&P 500 by almost 16 percentage points, the most in data going back to 2008.
That, too, is nothing new. Back in 2013 we said that in a manipulated market, the only way to generate alpha is to do the opposite of what everyone else is doing in “Presenting The Best Trading Strategy Over The Past Year: Why Buying The Most Hated Names Continues To Generate “Alpha” something which Morgan Stanley confirmed earlier this week when its equity strategist Adam Parker said “When You Think Of Something, Do The Opposite” according to whom the S&P500 is nothing more than a “bizarro market.”
Whether it is the “most hated rally” or merely the “most bizarro market ever”, one thing is clear: Bloomberg is eager to put as much lipstick on it as possible. After all, the “wealth effect” only works if everyone still has faith in central banks’ abilities, a faith clause which over the past 6 months has been severely tested. And there is only so much more debt corporations can incur to buyback their own stocks. This is what Bloomberg says:
Wall Street strategists see the bull market lasting at least through December, with the S&P 500 rising to 2,158, or an 9 percent increase from yesterday’s close, according to the average of 21 estimates compiled by Bloomberg. If the run lasts until the end of April, this bull will become the second oldest on record. Coincidentally or not, the last two ended near the eighth year of an election cycle.
It concludes with what is certainly “the biggest cliche ever”:
Tom Mangan, senior vice president of James Investment Research in Xenia, Ohio, which oversees about $6.5 billion, isn’t ready to throw in the towel. “There are too many bears versus bulls and there is too much cash on the sidelines,” he said. “That means the market can do better.”
Whether there is a bubble in pessimism, or merely too much money on the sidelines, it will be up to central banks to resolve the core dilemma of which way the market goes from here, starting with the ECB as soon as tomorrow morning.
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So While we wait for the conclusion, here is Deutsche Bank’s Jim reid with a summary of just how we got here.
It’s 7 years today since the S&P 500 hit it’s post GFC lows (and lowest since 1996) and it’s a year ago today that the ECB started QE. At the end today we go through a performance review of global cross asset returns since these two points. The graphs are also in the pdf in local currency and dollar terms.
7 year anniversary performance review:
Looking first at returns since the market bottom on March 9th 2009, unsurprisingly most assets have performed very well given the extraordinary stimulus thrown at markets by central bankers. In local currency terms the Micex (Russia) is the top performer (+253%), followed by the S&P 500 (+239%), Stoxx 600 (+176%) and the Nikkei (+170%). EU HY is the best FI instrument (+166%). In USD terms however, we see many assets lose ground – such as the STOXX and the Nikkei that surrender nearly one-fifth of their respective local currency gains as EUR and JPY were weaker during this period. However, this FX impact is most apparent in the case of Russian stocks, which gave up over 175% of cumulative local currency gains following the Ruble’s depreciation. So the S&P 500 takes poll position in dollar terms. The negative end of the performance spectrum is sparsely populated and dominated by the commodities complex. Oil is the worst performing commodity (-23%) and 2nd worst asset in the study, while agricultural commodities also lost big but Greek equities (-56% local, – 61% USD) are by far the standout loser. Brazilian equities (-15% USD, +34% local) join Greek equities and commodities near the bottom when dollar adjusted.
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