Equity markets have had a decent start to the autumn. In September overall markets finished up for the month, with MSCI World up 1.9% (in US$) and just about in the black for Q3, with a 0.1% gain. The year-to-date numbers, flattered by the collapse in Q4 2018, show MSCI World up 15.7% so far in 2019. But according to fund flow data from Deutsche analysts in the US overall positioning in equities” is still near neutral and not high in absolute, but very high relative to levels seen in prior periods of comparable slow [global macro-economic]  growth. Equity market pricing and positioning at current levels represent a strong view macro, as well as earnings growth, will rebound.”

This Deutsche analysis also suggests that the American benchmark index, the S&P 500, is priced for the composite ISM (a key macroeconomic signal) bouncing back to the mid-50s and earnings growth back to 10%. “It is also completely out of line with CEO confidence, which recently plunged to levels last seen in 2008”, observes the Deutsche analysts.

Quant analysts at SocGen have another spin on market developments over the last few months. They observe that value stocks, in particular, have rebounded heavily. But they worry that investors are “playing a game of chicken: hoping lower bond yields do not lead to a recession, but equally that the global economy remains sufficiently moribund to not cause bond yields to rise and negatively impact expensive defensive and growth stock valuations”.

An interesting hint that markets may be set for a volatile next few months comes from Tim Graf, head of Global Macro Strategy for EMEA at State Street. They have developed an internal Global Tail Risk score which is currently flagging ‘caution’. This signal combines a Systemic Risk Index with a Turbulence index for global equities “capturing unusualness of volatility and correlation. Higher readings of the combined signal indicate an increase in the probability of future drawdowns in risky assets. …. The spike over the last two months would indicate the relative stability of global equities over the last two quarters is under threat.”