Thursday, June 1, 2023

Morning Note: The "Echo Bubble" and the Quant Binge

A couple takes on the latest equity market action.

First, here's Bloomberg's Ed Harrison:

" looks very much like we’re in the midst of an echo bubble, with the Nasdaq 100 shares up over 30% this year.
And it’s just an “echo” because as recently as the beginning of last year, Nasdaq 100 stocks were more than 10% higher than today.
I think when one looks at the grand sweep of things, it’s going to be difficult to sustain this rally — not because the economy will fade. It will be because the interest rate environment won’t allow it."

Hence the "catch 22" we keep stressing... If, as remains (for now) our base case, the economy does fade, that risks an earnings hit that is not nearly priced into today's leaders' share prices... 

I.e., bad news for big tech if the economy hangs in, per, at first blush, Ed H. above, and potentially bad news if it doesn't.

At second blush, Ed is actually making a case for high historic real rates, as he anticipates higher nominal interest rates amid, actually, weakening conditions, à la '73/'74:

"...forget about fiscal policy, the debt ceiling and inflation. Focus purely on real interest rates as you think about how this plays out. And mesh that with the business cycle in terms of corporate profitability. Doing so will go a long way of telling you where we’re heading.

A high real interest rate alone won’t necessarily kill stocks. But it will when it is combined with a deep cyclical downturn as we saw in 1973-74 and in 2007-08. As bad as the tech bust was (with 4% real rates), it was still a garden-variety recession. Ten-year inflation adjusted returns on the S&P 500 were back to over 100% by November 2004. It took the Great Financial Crisis to wilt longer-term stock returns."

And here's from Toggle.AI on where the latest buying's been coming from: 
"When you dig beneath the surface you discover that there has been relentless buying by quant funds. So-called vol-control and risk-parity funds, which tend to automatically load up on riskier assets during calmer periods, ramped up equity exposure, according to the Deutsche Bank data, available through May 18.
Other quants, such as trend-following CTAs, or commodity trading advisors, have similarly piled in.
This is not the first time the seas have been calmed by quants. Quant-induced nirvana helped explain previous periods of calm trading, including long stretches in 2017 and 2018.
Notably, however, those periods were punctured by rapid selloffs, including the 2018 “Volmageddon” when the dynamics exerting calm on the market suddenly went away."

Stay tuned. 

Asian stocks leaned red overnight, with 9 of the 16 markets we track closing lower.

While Europe's leaning green so far this morning, with all but 10 of the 19 bourses we follow trading up as I type.

US equity averages are mixed to start the session: Dow down 186 points (0.56%), SP500 down 0.10%, SP500 Equal Weight down 0.30%, Nasdaq 100 up 0.11%, Nasdaq Comp up 0.09%, Russell 2000 down 0.37%.

As for yesterday's session, US equity averages closed lower: Dow by 0.4%, SP500 down 0.6%, SP500 Equal Weight down 0.2%, Nasdaq 100 down 0.7%, Nasdaq Comp down 0.6%, Russell 2000 down 1.0%.

This morning the VIX sits at 17.07, down 4.85%.

Oil futures are down 0.03, gold's up 0.55%, silver's up 0.65%, copper futures are up 1.44% and the ag complex (DBA) is up 1.32%.

The 10-year treasury is up (yield down) and the dollar is down 0.58%.

Among our 34 core positions (excluding options hedges, cash and money market funds), 20 -- led by URNM (uranium miners), VNM (Vietnam equities), EZA (South African equities), OIH (oil services companies) and DBA (ag futures) -- are in the green so far this morning... The losers are being led lower by Hack (cyber security stocks), Dutch Bros, MP Materials, Johnson&Jonhson, and PHO (water stocks).

"...if I had a dollar for every time I heard ‘challenging macro economic environment’ from companies in their quarterly calls I’d be able to buy a sports team." -- Peter Boockvar, yesterday
Yep! That (for now) jibes with our base case going forward.

Have a great day!

No comments:

Post a Comment