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Cross-Asset Returns Are The Best In Recent Memory, But Beauty Is In The Eye Of The Beholder

"All that glitters"...

For all the talk about how bullish Wall Street tends to be going into the next calendar year, it’s worth noting that the sheer scope of 2019’s gains has some analysts seemingly wary of projecting much more in the way of upside.

Of course, that doesn’t mean anyone is falling all over themselves to tell clients now is the time to take profits and run for the hills. Even the more pessimistic outlooks don’t predict massive losses. SocGen, for example, is still projecting a mild US recession in Q2 and Q3, but nevertheless sees the S&P sitting at 3,050 by year-end 2020, lower than current levels, but hardly consistent with the kind of losses you might be inclined to project in a recession scenario (note: the bank does see the economy recovering quickly).

For the most part, though, analysts are gun-shy. With the S&P well on the way to logging a near-30% gain for 2019, Wall Street is collectively projecting the smallest rise a year ahead in 16 years.

You can expect that average to drift higher (if it hasn’t already), but the bottom line is that after 2019’s blistering performance, predicting more double-digit gains is difficult, even if it doesn’t come with the same kind of career risk as going out on a limb and projecting an actual loss for US benchmarks.

Last week, we noted that usually, “objects in motion tend to stay in motion”, so to speak. Although the analysis is a bit convoluted due to the close proximity of blockbuster years in the 90s, since 1989 when the S&P has risen 25% or more, equities have tended to rise in subsequent years on the way to sizable gains.

Read more: Here’s What Usually Happens After The S&P Has A Blockbuster Year

One problem, though, is that profit growth is expected to be relatively meager in 2020. If margins get squeezed from higher labor costs and/or top-lines get hit by an economic deceleration, things could be even worse than already subdued forecasts. This year’s rally was almost entirely predicated on multiple expansion. If profit growth is lackluster in the new year, stocks will again have to depend on investors being willing to pay more for a dollar of earnings.

Credit Suisse’s Jonathan Golub – who has one of the more optimistic S&P targets for 2020 – isn’t particularly concerned. “Given historically low interest rates and risk premiums, we believe valuations have further to run”, he says. But even his target (3,425) is representing less and less upside thanks to stocks’ December surge.

Additionally, it probably won’t surprise you to learn that although objects in motion do tend to stay in motion, the average return for the S&P in years after a 20% gain is less than the average return in all years going back to 1928.

Meanwhile, equities are overbought. Recent gains have pushed the 14-week RSI above 70. That’s ostensibly worrisome.

And yet, as Bloomberg’s Andrew Cinko noted on Saturday, “in 2013 and 2017 the initial 14-week RSI overbought reading came at the start of long stretches of low-volatility gains [and] the eventual market correction arrived many months later”. That’s illustrated in the bottom pane.

Finally, beauty is in the eye of the beholder, just as gains and losses are everywhere and always a function of the window under consideration.

Measuring from the week before the bottom started to fall out for risk assets in Q4 of 2018 tells quite a different story that merely looking at 2019, which is essentially like measuring from a local low.

Viewed in that light, all that glitters is not gold – figuratively and literally.


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