Before I indulge the growing legion of equity bulls with yet more upbeat news about global money flows two curious side observations.
First off Investors Intelligence reports that the Australia ASX 200 index has made a short-term high at 6903.67. So maybe global warming and extreme weather aren’t so bad for local equities after all!
Also, Barclays economists warn over reports that “the halting of 737 Max production could weigh heavily on Q1 US GDP”.
My guess though is that bad news on airplanes will probably be ignored as investors wake up to the biggest bet of all, namely the Fed Put. Or put it another way, don’t bet against the US Federal Reserve and its amazing expanding balance sheet. I’ve already been reporting on this for the last few weeks but an insistent note today from analysts at Cross Border absolutely bangs the point home in legendary style. Cross border reports that global liquidity is setting new records as central banks start expanding their balance sheet girth again.
“Our GLI™ (Global Liquidity Index) hit an index reading of 70.2 in December 2019, its highest reading since 2009 and its sixth fastest rise in more than fifty years. The US Federal Reserve has been the main driver of this liquidity boom, with US liquidity rising at its fastest six-month rate since the 2008 GFC and the 2001 9/11 terrorist attacks. But measured over a 12-month span, as Figure 1 shows, this is the biggest US liquidity surge… possibly ever! We don’t buy the US Fed’s official rhetoric that its actions are simply ‘technical’. Their scale must surely jolt the economy higher and shake up bond markets. We continue to foresee steeper yield curves and expect US Treasury 10-year yields to test the 3% threshold.”
I will repeat my own take on this – don’t bet against the central banks. We are mid-way through a liquidity fuelled momentum rally.
Quite whether it makes sense either from a policy perspective or a long term macroeconomic perspective is for another debate.
My attention was also drawn to a note to investors by Charles Ekins, of Ekins Guinness – a smart quant strategist who also runs his own multi-asset class fund of ETFs. Charles was the former CIO at hedge fund Valutrac and is usually a perceptive follower of both technical and fundamental trends.
He reckons that US equities are (not yet) overbought. He’s got plenty of evidence of which two jumped out at me. The first is technical – according to Ekins the 50 Day Relative Strength Indicator is at 63, which is not currently showing the US Equity market to be especially overbought (unlike in January 2018) – the chart below fleshes this out.
The other key measure on my reading is that US equities are ahead because of the strength of corporate earnings and balance sheets. According to Charles “ one of the reasons that the US has outperformed World ex-US, and why the relative Value Yield is not at a record low despite strong market outperformance by the US, is because US cash earnings have outperformed World ex US cash earnings (yellow line below). We calculate our own measure of “income stream” (red line below) which is based partly on the dividend stream (blue line, in the chart below it, is in relative terms) plus a share of cash earnings”. Again the chart below fleshes out this astonishing outperformance gap.
If all this sounds a bit frothy to you, maybe you should have a look at the final chart below.
It’s from Andy Lapthorne at SocGen.
It reminds us that Growth stock valuations (see chart below) has only been this high in eight months out of the last 361.
Valuations are a big risk going forward says Andy, with some considerable understatement.