macro kaki: Another day, another record high for US stocks

By Mooris Tjioe, Analyst, Phillip Futures

Last week

☕️ Snapchat fell by an epic -27% in one day as ad businesses get bruised by Apple.
☕️ Nearly 1,000 US companies will report earnings this week.
☕️ Tesla reaches all-time high above $900 as earnings season mauls stock market bears.
☕️ A Trump-founded media company went public via SPAC, rises +845% in two days.
☕️ Bitcoin makes another record high at $66,976 as Bitcoin futures ETF launched in USA.

THE MACRO VIEW (1/2)

Another day, another record high for US stocks

QUICK SUMMARY

🚀 The S&P500 has made over 50 record highs this year – the most in a year since at least 1995.
🚀 Equity allocations are the highest on record anyway as other assets underperform.
🚀 Asian stocks are however seeing their lowest relative corporate profit forecasts in over 10 years.

If you’ve been having a niggling feeling that stocks have been overvalued, fret not – you’re not mistaken. Despite economic forecasts increasingly predicting sharp slowdowns in economic growth for the quarters ahead, optimistic investors have continued to pile into stocks, driving all sorts of valuations higher.

Things are nonetheless looking worse for investing in stocks

The good news: valuations no longer seem as high as they were at their peak in Feb-March this year, as earnings have been increasingly catching up. The bad news however, is the arrival of higher inflation and increasingly convincing signs of slowing economic growth – both being events that will chomp away at corporate profits in the coming quarters and years ahead.

The closely-watched Bank of America ‘Global Fund Managers Survey’ also showed that expectations of both high growth and high inflation have deflected off of their decade-long highs, and a sharply increasing number of funds now expect economic growth to come in lower, even while inflation numbers continue staying high.
Besides that, measures used to estimate when the market thinks an interest rate hike will be done – and to what degree, show that most now expect that there will be two rate hikes by Jan 2023, ahead of what was previously believed – with signs that those expectations may rise even faster than some people think.

TL;DR: Slowing growth, higher inflation, higher interest rates – traditionally bearish scenarios for stocks are starting to show up.

But can’t stop investing in stocks anyway because: what else would you rather invest in?

Interestingly – despite the increasing pessimism, the BofA survey also showed that funds were the most pessimistic on bonds that they’ve ever been within the past 20 years. Similarly, research from Goldman Sachs led by David Kostin showed that equity allocations amongst market participants ranging from households to institutions have reached an all-time high of 52%, largely due to bonds offering unattractive returns in the current environment.

Allocations to fixed-income and cash have accordingly dipped, reflecting the market’s increasing risk appetite – even as risks of an economic slowdown and runaway inflation continue to rise.

TL;DR: As long as stocks continue to outperform most other asset classes, it looks like the party will just keep going.

So, what to invest in?

Value stocks may be worth a second look again. After outperforming growth stock for much of the first half of 2021, the rapid spread of the Delta variant saw value stocks in general bleed away its gains over growth stocks.

With much of the world moving towards higher vaccination rates and economic re-opening (despite persistent worries over the further spread of COVID-19), it may be time for value stocks to shine yet again, with opportunities in areas such as financials looking especially worthy of attention (the S&P500 Financials Index is up +37.7% YTD).

Looking at other near-term data, while the S&P500 came in at -4.8% for September, a composite index tracking hedge funds came in at +0.1%, led by an increase in energy, utilities, and industrials, suggesting that a tilt towards value-related stocks could see outperformance during this period. While these are sectors that tend to underperform in more “normal” times, spiking energy prices, supply chain turmoil, and a continuing post-pandemic economic re-opening are providing unique opportunities for investment or shorter-term trades in these sectors.

Meanwhile, beware the Asian earnings revision

While US investors enjoy the next few weeks of earnings, a measure of Asia-Pacific stocks versus the world has shown that stocks from Japan, China, South Korea, Australia, and other Asian economies are seeing plunging earnings forecasts after around a decade of outperformance, fuelling increasing pessimism over Asian stocks even as US equities are experiencing a major earnings earnings-induced bump.

THE MACRO VIEW (2/2)

Bitcoin-related stocks: How to choose?

That depends, but the stock market’s increasing exposure to Bitcoin is certainly worth watching

Interest in Bitcoin is back, following a new all-time high at $66,976 on the 20^th of October. While overly high volatility may be a major factor stopping many from diving into cryptocurrencies, there have been a growing list of companies with increasing correlations to Bitcoin’s price performance.

This does then spawn an interesting thought – instead of investing in Bitcoin, which is commonly believed to not be able to generate a yield (the thriving world of de-centralised finance (DeFi) is working to change that), would it be viable to invest in Bitcoin through a company’s stock instead?

From the above chart, we can note that stocks such as Riot Blockchain and Square Inc rises and falls somewhat in tandem with Bitcoin’s own cycles – although Riot Blockchain’s volatility is far more than many other kinds of stocks.

Taking it one step further, here are some correlations between Bitcoin and various stocks, as well as their price performance for the year-to-date.

U

*Robinhood IPO-ed at $38 on 29^th July 2021. When accounting for correlation with BTC from 31^st July, correlation rises to 0.112.
**Coinbase IPO-ed at $381 on 14^th April 2021. When accounting for correlation with BTC from 15^th April, correlation rises to 0.599.

Basic Explanation:

1. A positive number signifies a positive correlation between the two securities. A value of 1 suggests that the two securities move perfectly in sync with each other.

2. A negative number signifies a negative correlation between the two securities. A value of -1 suggests that the two securities move in perfect opposition with each other.

3. A value of zero (or close to zero) suggests that price movements in the two securities are uncorrelated.

Interpretation:

4. Accounting for Coinbase’s shorter timeframe for assessment, Riot Blockchain provides the highest correlation to Bitcoin (0.600), followed by Coinbase (0.599) and Marathon Digital Holdings (0.556).

5. Robinhood Markets provides surprisingly little correlation with Bitcoin, having a lower correlation coefficient (0.112) than even Apple and Amazon.

6. Blue-chip tech stocks such as Apple and Amazon may provide a better hedge against Bitcoin than the benchmark S&P500.

WEEK IN STOCKS

CHART OF THE WEEK

Market’s inflation expectations at highest level in over a decade

The 5-Year Breakeven typically reflects the market’s expectation of average inflation rates over the next 5 years (similarly, the 10-Year Breakeven Rate would reflect expectations of average inflation rates over a 10-year period), being made out of the difference in yields between a 5-Year TIPS and a government bond of similar maturity.

The measure recently broke 3%, although it has now returned to around 2.93% – a level last seen around 2004. 2004 itself was a relatively extraordinary year, where inflation expectations jumped when then-Fed Chair Alan Greenspan decided to slash interest rates to 1.0%, the first time rates in the USA had gone so low in 58 years.

Similarly, inflation expectations across the world have been rising as well. Most interestingly, the 10-Year Breakeven in Germany has hit its highest level in eight years on the back of ridiculously high inflation numbers. Such developments may very well be an interesting test of resolve for the European Central Bank (ECB) – who have not executed a rate hike in more than a decade.

EARNINGS IN SIGHT

WHAT WE MENTIONED

CFDs

Shares CFD is available for trading on Phillip MetaTrader 5 (MT5).