A lackluster start to the new week notwithstanding, the market has moved from TINA to FOMO, Goldman writes, in a Monday evening note, employing two ubiquitous acronyms in the course of expressing something akin to optimism about the path forward.
By now, everyone knows the story. US equities have scaled new peaks thanks to the assumption that the “legendary” dealmaker who occupies the Oval Office is on the verge of acquiescing to tariff relief for China in exchange for a set of commitments which Beijing almost surely will not honor.
But whether or not this is a “real” deal is immaterial for market participants, many of whom gave up on the idea of a meaningful agreement between the world’s two largest economies a long time ago. All that counts now is getting the tariffs rolled back so the global economy can find its footing, because as things stand, the global PMI is still parked at listless nadir below 51, tied for the second-weakest level in seven years.
But things are about to turn, Goldman reckons.
“Our economists think most of the slowdown might be behind us, at least in the US, and expect a pick-up in activity”, the bank says on Monday night, adding that “on the trade front, while tariffs on some Chinese goods might remain at the current level through 2020, they are unlikely to increase further”.
For the first time in years, Goldman’s cross-asset risk appetite indicator is “clearly positive”, and better still, “growth” has taken over for “monetary policy” in terms of what’s in the driver’s seat.
(Goldman)
The bank goes on to note that defensive positioning is being unwound, helping risk assets along. In a true testament to the mood, last week saw the biggest outflow from TLT in history, at $1.2 billion.
(BBG)
Talk of a pro-cyclical rotation is all the rage this month, as rising bond yields drive an unwind in bond proxies and a renewed bid for cyclicals and value.
Goldman continues, noting that “equity skew has declined from its elevated September levels, there’s been a sharp increase in call option buying [and] there has been a large increase in weekly flows into global equity funds”.
(Goldman)
The message is simple. “The market is moving from TINA (There Is No Alternative), i.e. search for yield, to FOMO (Fear of Missing Out)”, the bank declares.
But it’s not all good news, and it might be wise to think twice before backing up the proverbial truck. As we saw in Hong Kong on Monday, the snapback can be painful when equities become detached from economic and geopolitical reality.
And despite signs that the US economy may yet manage to put off a downturn for another several quarters as the elderly expansion wheezes its way into 2020, there’s precious little hard evidence to support the contention that the global manufacturing slump has bottomed or that the rebound will be swift even if a Sino-US trade pact is sealed.
Goldman acknowledges as much. “The hurdle rate for positive surprises has increased further [and] equity valuations have re-rated materially”, the bank cautions, in the same note, on the way to saying that partly because “the risk of setbacks remains”, they’d rather “position selectively via call options on cyclical equity indices as they can help hedge rotation risk”.
So, not all-in.
FOMO has some seasonal dependence. At this point in early November, if the manager didn’t go to positioning extremes during the year, most portfolios should be looking pretty good on a YTD basis – after all, we’ve been in an “everything worked” period. Most managers are wishing the year could end now. So the motivation to up risk and chase performance is reduced, and the desire to protect the years’ gains is palpable. How about FOFU (Fear Of F____g Up).
Good point, good acronym! Nice!