Apparently, It’s A Binary Choice: ‘Cash Out, Or Go All In”

Apparently, there are only two options right now: “Cash out or go all in”.

That bit in quotes is the headline on a Bloomberg article that’s been at the top of the site since it was published just after the close on Friday.

The point, basically, is that when stocks have gained 16% and it’s “only April”, anyone lucky enough to have participated will invariably be tempted to “take the money and run” – especially when the S&P is “back to a place where it has twice crashed.”

It is, of course, the same thing across credit and risky assets more generally.

For example, HY spreads have tightening dramatically off the Q4 wides and investors seem to have completely forgotten about the “BBB apocalypse”/”fallen angel doomsday” narrative. BBBs have returned nearly 6% so far this year. Q1 was the best first quarter for BBBs since 1995.

Obviously, it’s not as simple as “cash out or go all in.” One CIO told Bloomberg the following for the piece linked here at the outset:

The first quarter’s rally would have been good enough to shut the whole year down and call it a day.

That assumes you were in the game in the first place and maybe Scott (that’s his name) was. But as we’ve been over on too many occasions to count, key investor groups have not participated to the extent they would have liked, which is at least in part responsible for underperformance from, for instance, equity hedge funds. We showed you this chart last Sunday, but we’ll run it again:

Needless to say, that 5.9% gain in Q1 of 2019 doesn’t stack up well against the S&P’s 13% gain over the same period. There’s (still) an argument to be made that pervasive underexposure will eventually “force” in reluctant money (either via humans in the discretionary crowd capitulating or via suppressed vol. and “in-trend” dynamics yanking in systematic investors) and indeed, that’s a big part of the bull thesis from here.

As Bloomberg also notes in their “all in/cash out” post, the fundamental backdrop leaves something to be desired right now. Q1 is expected to show earnings declining for the first time in years and the US economy is set to decelerate, Larry Kudlow’s hoarse protestations notwithstanding. Meanwhile, valuations are again stretched. Here’s a snapshot from Goldman:

(Goldman)

We would gently argue that all of the above (even earnings season) will take a backseat to the ebb and flow of the “cyclical reflation” narrative and thereby to what comes out of China over the next couple of months. There’s been plenty of evidence in April to support that conclusion. Markets were giddy at PMI beats from Beijing last week and on Friday, better-than-expected exports data and across-the-board beats on Chinese credit growth for March set the tone well ahead of JPMorgan’s earnings.

In that context, the most important takeaways from earnings season in the US could well end up being what management teams say about China and/or what can be divined about the nascent “cyclical reflation” narrative from calls/guidance.

Meanwhile, central banks will continue to underwrite and perpetuate a reinvigorated hunt for yield, which is itself a vol.-suppressant and, depending on the context, a cycle-extender.

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