Ro'Macro #10: Time to look the other way ?
Since the Covid-19 crash in March 2020, investing in US stocks was the best thing you could have done, maybe it is time to look at other options...
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After 2 very quiet weeks we are back again with a new article, this time we are rising questions. The market is full of uncertainties so I won’t risk to draw any conclusions out of this, we are here to think about the current state of things and the available options if we need to change something! Let’s go!
The starting point of this reflection is that since the Covid-19 lows in March 2020 if you invested your money in the S&P 500 you would have doubled your capital. These days with crypto no one cares about 100% performance unless it’s done in 5 minutes but normally its not something that happen really often in the markets in such a short period of time.
My question is, with all the uncertainty about Covid, Inflation, FED Policy, would it be time to look elsewhere to invest ?
Here are my reasons to think about that :
1) Market concentration
The number of stocks making new highs these days are collapsing, meaning there is shorter and shorter number of stocks that drive all the index to the top but at some points if no one is moving higher, where are we going ?
As Goldman Sachs highlighted recently, they called the trend for the past year and a half UPLT, and here’s what happen when you put 1$ in the S&P 500 :
“UPLT = USA, Passive, Large cap, Tech. Tech stocks has seen 11 straight weeks of inflows. Let's simply call this 2021 dynamic = USA, Passive, large cap, tech. It's made it hard to tactically short the market, and broad indices grind bps higher. If you allocate $1 into SPY, that means 6 cents into AAPL, 6 cents in MSFT, 4 cents into GOOG/L, 4 cents in AMZN, 2 cents into FB. That is 22 cents of every $1 into 5 stocks. If you allocate $1 into QQQ, that means 11 cents into AAPL, 10 cents in MSFT, 8 cents into GOOG/L, 8 cents in AMZN, 4 cents into FB. That is 41 cents of every $1 into 5 stocks.”
Passive assets just surpassed active assets, it’s now the dominant way of investing and we have to understand that it will bring even more concentration as people put more money into ETF. As Goldman said, for 1$ into SPY it’s 22% that’s going into Tech, for QQQ it’s 41%. That explains part of what is going one. People are putting money into ETF which buys mostly the biggest names. But what if people stop putting that much money into ETF ? Or what if even the biggest names don’t support the index anymore ?
You can clearly see in the chart what happened previously when this number is going down…
Great chart from The Market Ear, highlighting all the bought dip during the past year, but as they they, what if this dip is not bought ?
2) What about non-US markets ?
The US market is obviously the most important market in the world as it dictates almost everything but what is going on elsewhere ? Here is some chart comparing S&P 500 and other indexes.
First one is SX5E (Euro Stoxx 50), as you can see both are a correlated a lot but since the beginning of this summer Europe as lagged a bit. However, we can see now that Europe is stabilizing when the S&P500 is showing some signs of weakness. Europe is handling the Covid-19 pandemic better than the US at the moment, it might be an advantage to get some stability. Still, I have to admit in Europe German and French elections in 2022 might add some volatility in the coming months.
Second is China, this one will be a bit controversial and very complicated because China situation is very tricky with President Xi basically doing whatever he wants with Chinese companies and putting them into the ground in a day. Anyway, we still have to recognize the potential of China over the long term, it’s a country that grew by more than 6% per year during the past 30 years, it won’t stop just now. Even if this market require more research than other because we have to take into account the political ans regulation risk (by that I mean Xi decision, China isn’t changing government anytime soon), I can’t think that the gap with the US will be that wide forever.
Third is Japan, on this one we can clearly see what is happening, the gap was very wide and then investors realized that it wasn’t justified so the gap was filled. Is it finished ? Might be, might not! But what I want to highlight is that there is opportunity outside the US and that we need to look closely because Japan filled the gap in 1 month, that doesn’t give you much time to react so it’s important to be ready to move when opportunities are presenting themselves.
3) Volatility
VIX is the volatility index that basically measures stress on S&P500, for the past year we can see that the only way was down, because S&P 500 was going only up, we already seen more than 50 new ATH this year = NO STRESS. Since July sell off it seems that the trend is reversing, as the second chart below shows, we are entering in the period where volatility is quite high. Could be nice to be invested where the waters are calmer…
On this chart that shows volatility seasonality for the past 20 years, we can clearly see that we are entering into high volatility season, September and October are the most volatile months on average.
4) Skew
”SKEW Index is a global, strike independent measure of the slope of the implied volatility curve that increases as this curve tends to steepen” that’s the definition on Bloomberg. Meaning, when this Index rise, people are paying up for downside protection, and less eagerly when it goes down. you might say, so if people aren’t buying protection, they are optimist that’s good ! The fact is most of the time people are buying protection when the house already burned… implying that if people aren’t buying protection they are not cautious enough.
5) Fear Index
This Index measure market sentiment, we are only 2% from the all time high, that shows how the market sentiments is fragile at the moment…
Thanks for reading it, I hope you enjoyed and that I gave you enough to make you think about your next move or ideas for future things to look !
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