2021 And The ‘6 P’s’

It’ll be “tough” for equities to keep hitting new highs now that volatility, spreads, and yields have all collapsed, BofA’s Michael Hartnett wrote Thursday evening.

Following March’s pandemic dramatics, rates vol, credit spreads, and the VIX have retraced between three-quarters and 100% of their panic moves, making it more difficult for vol and spread compression to nudge stocks higher.

This “hints at ‘peak policy’ stimulus,” Hartnett said.

Indeed, the relentless trek higher for equities stalled in September, when summer’s options mania-inspired melt-up finally de-frothed into a tech correction.

Now, equities and rates are anxiously awaiting an epoch-making election stateside for direction. A Democratic sweep ostensibly means a stronger fiscal impulse and a more redistributive tax regime, with the former generally seen outweighing the latter in terms of the longer-term impact on equities, even if the knee-jerk reaction to a “blue sweep” would be risk-off.

Hartnett talks of the “6 P’s of 2020.” They are: Price, positioning, policy, profits, pandemic, and politics. We’ve already seen a “historic” price rally, he notes. If the history of “great market rallies” is precedent, the S&P will peak between 3,300 and 3,600 between the election and inauguration.

Positioning remains neutral, something that might seem strange to casual observers who have heard tales of Robinhood manias and tech bubbles. But through it all, flows into equities (on the funds side, anyway) have remained muted until very recently. Over the past three weeks, $24 billion has found its way into stock funds.

On policy, Hartnett continues to pound the table (or, if that’s too strong, let’s just say he reiterates some version of this each week) on the impossibility of 2021 looking anything like 2020 when it comes to monetary and fiscal stimulus.

Bickering in the US over the “right” amount to spend to rescue the economy is indicative of the political hurdles to government spending. It’s also a sad testament to the fact that lawmakers and the public do not understand how money works in currency-issuing nations with sufficient monetary sovereignty.

Hartnett includes the following table, and I suppose what I would gently note is that lumping in France, Spain, Italy, Belgium, Singapore, and Brazil with Japan, the US, Canada, and the UK is not correct if you’re trying to make a point about “sustainable” government “borrowing.” 

When it comes to profits, BofA continues to point to a model of global EPS growth based on Asian exports, PMIs, Chinese financial conditions, and the US yield curve. That model predicts flat profit growth over the next 12 months, versus consensus estimates for a -12.5% decline.

As for the pandemic and politics (the last of the “6 P’s”), suffice to say there’s considerable uncertainty. Hartnett notes the IMF’s warning that the scarring effect of the pandemic will reduce global output by tens of trillions over the next half decade, and suggests recent price action stateside is indicative of “liquidity addiction” — a “new” buy-the-rip mentality as opposed to the “old” buy-the-dip mantra.

As long as you’re buying, it’s fine. Or something.