Same story, different day.
“It’s all relative.”
“Our sense is that most clients are ‘reluctantly long’ equity given absolute returns are likely to be lower in the future relative to the recent past, but on a relative basis the asset class still appears the most attractive,” Goldman writes, in a note out this morning.
Yes, “on a relative basis.” In other words, as Deutsche’s FI team suggested months ago, bonds are acting as a “crutch” for stocks, which are free to get even more expensive as long as bonds and credit remain in an eye-watering bubble.
This situation has become absurd. Thanks to such “stable” sources of carry as the ubiquitous short vol. trade, there’s no glory in prudence. The next guy is still riding the carry gravy train, so if you aren’t fully invested, you’re falling behind. Whatever sleep you gain from knowing you’re not in assets that are trading the most expensive in 200 years is offset by the sleep you lose from underperforming not only your peers, but also “Joe E*Trade” who, if he’s not making a fortune in XIV, is at least riding SPY to the promised land and paying less than 10bps to do it.
Well, in yet another testament to the idea that this state of affairs can persist as long as the Fed keeps the communication loop intact and as long as the ECB and the BoJ are buying more assets than Yellen is letting roll off, Goldman notes that there have only been four other times in market history when the S&P has gone this long without a 5% correction:
Trade accordingly (which I guess means buy more SPY).
But do mind the mean reversion…
I’m retired so I have a couple of issues that are not jointly compatible with the current situation. First, I rely on investment income, not prices for my living so a market drop is not critical until it damages my current yield. Second, even if I wanted to get out before the fall, and even if I knew exactly when it was coming, I’d still have three problems. My portfolio contains more than 200 individual securities so getting them sold would be a chore. Also, my positions have a 60% unrealized gain. If I sold I would have to pay taxes on that gain. This would create a huge tax bill which would impair my capital until the market gained more than the taxes. The I wouldn’t be up, I’d just be even. Finally. while I’m out how do I eat? My income would mostly be gone. I’m not the only one in this position so why do people keep telling me: the market’s gonna crash, better sell your stuff? So I suffer with what professional fixed income investors used to call the “lock-in effect.”
Buffett is there too. So are a lot of active managers.
S&P funds are locked in via ETF’s and investor mutual funds.
Plus any one in a 401 k and not retired I will be hesitant to sell till the music stops.
I am retired too and I face the question of when?