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President Trump's decision to intensify the trade war with China rather than end it, comes at a time when major investors are lowering the guards.
The remarkable rise in stocks since the depths of December hurt many investors who entered the year in the spirit of the bear market and in a defensive investment position. It hurts at least the relative performance of their portfolio and their ego.
Buyers could rightly say that "the pain trade was more intense" for most of the race, which means that maintaining the strength confused the majority, which the market often likes to do.
Yet, as the resolved rally of 2019 entered its fifth month, it is clearer that higher prices from here would be the least expected and uncomfortable move. All things being equal, it does change the outlook for equities.
The positioning and opinion of professional investors now reflect a broad acceptance of a resilient US economy, a mere pause in corporate earnings growth and the possibility of a further rise in indexes over the course of the year.
At the same time, the crowd is not overexcited by the spectacular 17.5% boom since the beginning of the year in the S & P 500 and individual investors have for the most part refused to continue rising.
Taking into account market action that has been remarkably stable so far, all this suggests that the risk-reward relationship is more balanced at present – just as seasonal factors become less important. favorable and that we can expect the Fed's trade policy and surprise to be surprised.
"The positioning is long"
Deutsche Bank's strategists follow various institutional investor segments in order to track their position vis-à-vis equities. For months, this work left a lot of room for tactical funds to continue to increase their exposure to equities. Last week, Deutsche said roughly that the street was quite full, but not at too high levels:
"The list of positioning indicators suggesting that the positioning is long: the net futures contracts on the futures have increased during the last 4 weeks and are now at the top of their range, although not quite to the extremes reached in January 2018, the flight control funds are at most equity allocations.The funds at risk parity have bought shares in recent weeks with an exposure now in line with their historical average. "
The Daily Sentiment Index of professional traders ended last week at 86% up and exceeded 90% in previous weeks. The passionate embrace of several recent climate-focused IPOs, ranging from Beyond Meat to Zoom Video to Pinterest, suggests that speculative juices are flowing faster. The S & P 500 nearing the 3,000 with an unemployment rate reaching its lowest level in 50 years could speak of "mission accomplished" as successes for the rally, at least for a short time. Just in time for the Uber IPO, controversial and generous, with WeWork and perhaps even the aggressive Fund Fund Vision SoftBank.
The peaks of the market are not growing simply because more and more investors are in a good mood about stocks and realize the recovery. And a strong IPO market should become a lot silly to represent a major warning sign.
But as the market as a whole is no longer obviously cheap (as it was briefly in December) and earnings forecasts for 2019 remain stagnant, while most companies exceed the forecast of first-quarter results the bullish stance and psychology may leave the market less able to take on an unforeseen challenge to the optimistic case – such as a new tariff cycle on China imposed by the White House, for example.
Comparison of 1987
The most constructive factor in handicapping the market this year has been the behavior of the market itself. Until now, he has refused to yield to many profit taking, limiting the lows to around 3% this year. The clear leadership of large-cap growth / technology technology stocks has been complemented by the strengths of consumer, industrial and financial brands.
And of course, the story of the years that have skyrocketed in the first four months is relatively positive for the next eight months. Even in 1987, the last time the S & P recorded a similar gain from January to April, the famous crash occurred after the index rose 40% in August.
Nevertheless, it has become easier to quibble in recent weeks with the character of the market advance. The pause for a new summit last week was timid and marginal, just a few points, with Friday a brake not to fall on the S & P weeklong records.
The number of new daily highs of 52 weeks has not increased much, notes Bespoke Investment Group. Some areas of leadership have been tired or weakened – software, semiconductors, emerging markets, and homebuilders. And credit spreads at risk have stopped improving during the latest surge in stocks.
Retail investor always on the sidelines
The Wall Street optimists still want to say that the pain trade is higher than they have to quote the flow of funds from retail investors. The public continued to draw money out of stock funds this year, as princes had climbed.
Source: J.P. Morgan
This is not the usual mode, although in 2016, something vaguely similar occurred, another time bonds have retained their appeal because of low yields and generous central banks. There is surely a demographic effect, with retirees and near-retirees systematically using own funds.
It would be strange and counterintuitive that the market has dramatic or lasting problems with the public network vendors during the recovery. However, as the chart above shows, significant net inflows have been only a quarter since 2015, and the market experienced many intermittent declines over this period, before reaching record highs. .
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