Well, it’s the same old story/question: Are you still confident in your cash equity position considering stocks are not far off record highs and valuations are still stretched even as the geopolitical outlook continues to deteriorate?
There are reasons to be bullish: record corporate earnings, fiscal tailwinds (even if you think the myopia inherent in late-cycle fiscal stimulus is dangerous over the longer term), re-risking by the systematic crowd and of course buybacks.
But the threat of a trade war and a steady tightening of financial conditions bodes ill, and emerging markets are looking decidedly shaky. Oh, and don’t forget that the biggest bullish technical of all (the supply/demand distortion that goes along with the QE “flow” effect) is fading. Indeed, as BofAML reiterated in the wake of the ECB decision, global QE will turn negative on a YoY basis starting in March of next year and when you think about dollar liquidity, do note that steady USD appreciation effectively mutes the effect of ECB and BoJ asset purchases in dollar terms. From BofAML:
Note how fast the YoY growth in global QE has declined of late. What’s behind such a quick drop? The ECB has been purchasing fewer bonds in ‘18 and China FX reserve growth has cooled (on the other hand, BoJ QE has been relatively stable, and the Fed continues with modest balance sheet run-off). However, the sharp drop in the global QE pace lately has been exacerbated by the US Dollar rally which began in mid-April.
Chart 2 shows the change in monthly QE volumes, just to emphasize the above point. As can be clearly seen, the volume of monthly global QE buying has declined significantly over the last two months, commensurate with the USD appreciation.
Well, if you think the upside for U.S. equities might be relatively limited from here considering headwinds and considering valuations, Goldman’s Rocky Fishman thinks it might be a good idea to take advantage of this:
In case it isn’t clear enough, the point is that if you think your upside might be limited, you can overwrite your position and earn some income from elevated call prices.
Specifically, Fishman says if you think it’s going to be difficult for the S&P to meaningfully outperform Goldman’s year-end 2019 S&P target of 3,000, you can “replace [that] uncertain, and hard-to-achieve, upside with known income [by] selling Dec-2019, 2900-strike calls vs. existing long positions for $149 (indic. bid, ref. Sep. future 2775).”
Assuming the S&P stays below 3,049 (which would be 10% higher from here), that strategy (i.e., overwriting your position) would fare better than an outright long.
So I don’t know. I’m sure someone won’t like that idea, but it’s worth noting for those in a position to, well, in a position to put on that position.