Admittedly, the “not much gas left in the tank” story for risk assets in 2019 is getting a bit tired at this point, if only because it’s a self-evident conclusion after a rip-roaring start to the year.
That said, reader interest in that narrative is high thanks presumably to the fact that flows data, measures of exposure for the fundamental/discretionary crowd and anecdotal evidence from fund manager surveys suggests this has, to a certain extent anyway, been a rally that “nobody owns”, so to speak. That sets the stage for folks to chase as “FOMO” rears its ugly head.
As far as what happens from here, it’s easy to argue that investor sentiment will live and die by whether political tension and trade friction abate. On that score, there’s considerable doubt about the prospects for resolution. Democrats inside the Beltway have turned up the pressure on the Trump administration, the Brexit stalemate appears intractable, EU elections loom and “enforcement” is the new “structural issues” when it comes to stumbling blocks for a Sino-US trade deal.
Meanwhile, the outlook for global growth continues to cast a pall over markets as do questions about the capacity of monetary policy to reflate.
For the past six months (and really, for longer than that), SocGen has been one of the more cautious voices on the Street and the bank was out Friday with an updated 2019 outlook which is worth quickly highlighting.
The bank begins by noting the obvious, which is that “a lot of good news is already priced in.”
“Year to date, the EuroSTOXX 50 and S&P500 have rebounded by 11%, with the S&P500 mainly driven by P/E rerating [and] these equity indices are now trading at 2019 P/E multiples of 13x and 17x respectively, having totally recovered from their December sell-off”, they write.
Much of this is of course down the dovish pivot from central banks, as illustrated in the following two simple charts which show the dramatic repricing of the rate path for the Fed and the ECB.
When it comes to an imminent resolution to the trade war, that too appears to be largely priced in, at least if you go by trade-sensitive sectors in Europe and the DAX. Notably, 2019 DAX multiples have completely retraced.
This is all set against a backdrop where the odds of a US recession realizing in 2020 are rising. At least according to some measures.
“The probability of a recession in the US in twelve months has doubled over the past six months according to the Federal Reserve Bank of New York and is standing at 24%”, SocGen goes on to say, adding that the bank’s SG US Economic Newsflow Indicator (we’ve mentioned that indicator before) is now “back to levels seen only in 2000 and 2008.”
Again, it’s hard to know whether there’s any marginal utility in highlighting this kind of commentary given how pervasive the “all the good news is priced in, and yet the chances of a downturn are rising” narrative has become.
But circling neatly back to what we said here at the outset, the reason there’s so much interest in this appears to be tied to the idea that “taking some off the table” isn’t a wholly applicable market adage right now given a lack of participation YTD by key investor groups.
So, it’s not a matter of “should you lock in some gains?”, but rather a question of “should you jump in?” based on the assumption that dovish central banks and a trade deal presage further upside.
If you ask Wall Street, the answer appears to be an unequivocal “no”.
If you ask Donald Trump, the answer is “big spike.”
Who can you trust?