‘Now Is Not The Time To Be A Contrarian Hero’, Equity Strategist Warns

Feeling emboldened after Wall Street’s best comeback of 2019?

You should probably cool your jets. The most important takeaway from Wednesday’s dramatic turnaround that saw the Dow reverse a 589-point drop to turn positive in the final hour of trading, was that there wasn’t one – a takeaway, that is.

As we wrote earlier, there was no news to invalidate the growth concerns and trade jitters that helped send bond yields and stocks tumbling on Wednesday morning in the US. Over the course of the session, Sino-US tensions mounted, with Global Times editor Hu Xijin seemingly ruling out further talks.

Read more: After Wall Street’s Biggest Comeback Of 2019, All Eyes Turn To The Chinese Yuan

If you were worried about the macro picture at 8:00 AM in New York on Wednesday, there was no identifiable reason why you should have been less worried at 4:00 PM.

In a note out Wednesday evening, BofA’s Ajay Kapur employs his straightforward style in the service of warning against the temptation to “be a hero”.

“Ten days ago, we highlighted that risks are rising and need careful monitoring”, he begins, before cutting straight to the point. “Since then, risks have mounted, red lines have been crossed [and] we advocate a further cut in portfolio risk”.

Nothing complicated about that. But just to reinforce the point about the macro fundamentals, Kapur reminds everyone that “of the 41 countries with PMIs, the net proportion of those which saw YoY rise in PMI in July is -61%, down from -56% in June”.

(BofA)

He also reiterates the shrinking global monetary base point, which he makes (almost) every week. “No update here”, he says, flatly. “It was shrinking 2% YoY in June”.

To be fair, that’s actually an improvement from March, and Kapur of course points out that the end of balance sheet rundown at the Fed will help, but as you can see from the chart, things almost never turn out well when the monetary base is shrinking as it is now.

Kapur also cites the recent acceleration in the collapse of the US curve, something Donald Trump has now picked up on, as evidenced by his Wednesday tweets. At one point Monday, the  3m/10y curve was inverted to the tune of 32bp.

“This has gotten worse in the past 10 days. The US 10-year to 3-month yield curve was -2bp ten days ago, it is -29bp now”, Kapur says. He’s not one to mince words when it comes to bad omens.  “We are always wary of the capital destroying properties of an inverted yield curve”, he adds, without equivocation.

Ultimately, Kapur has a simple message for folks at a delicate juncture. “Our bottom line view” is that investors should “reduce risk”, he says. “Now is not the time to be a contrarian hero”.