US Stocks Are Becoming ‘Less Useful,’ One Bank Says
It's been "a while" since the imperative to own cyclicality was as strong as it is currently.
That's according to SocGen's Andrew Lapthorne who, in a new note, emphasized the extent to which the Nasdaq 100 and the S&P are "struggling" to digest higher bond yields.
I spent a good portion of Monday (here and here) reconnecting the dots for folks who might just now be coming around to why it is that rising yields are problematic for benchmarks skewed towards mega-cap tech heavyweights.
Two f
At least in March, 2000, the 10 yr UST yielded about 6%.
Without further clarity on where rates are going (and why), at least SPY has a dividend yield approximately equal to the current 10 yr UST yield.
There is a lot of money floating around out there, and moving from SPY to bonds sounds overly cautious (and boring)…..no doubt, I recognize I might have to “eat my words”, but I will take that risk.
What is so hilarious is that real rates are still negative and will probably be negative for far longer than any of us care to admit.
The longer bond $TLT is an amazing lesson on negative convexity. Nominal rates will have to be a lot higher before I would consider buying bonds.
Look at the sector ETFs over the past week. The worst performing are highly cyclical XLE XLF and the best are XLP XLY which are anti-cyclical since XLY is dominated by AMZN. Cyclical XLB and XLI have also underperformed SPY. All the cyclical sector ETFs just mentioned have underperformed QQQ in the past week.
Look at the style indicies over the past week. Large value RLV-RUX has underperformed growth RLG-RUX, small value has RUJ-RUX has underperformed growth RUO-RUX, and not by a little.
You’re talking about one week that included an oil price collapse.
Andrew is talking about the broader macro picture. Cyclical value has crushed secular growth since the election. XLE outperformed QQQ by 22 (!) percentage points in February. And you’re talking about last week?
And, yes, into month- / quarter-end you could well see a reversal in favor of QQQ if rebalancing flows help stabilize the long-end in rates.
Below is from Charlie M.:
“Hints of potential (much-hyped) qtr-end rebalancing flows, with recent trend reversals seen across assets / themes (which some I believe are misinterpreting as “risk off” flows): Bonds are yet-again bull-flattening (Asian RM buying again, with selling in the front-end), broad Equities lower (but with NQ o/p RTY on the aforementioned UST / duration “bid”), while Commodities (and particular Crude Oil -3.9%) are trading sharply weaker against another blast of broad USD strength”
And here’s YTD from Charlie:
“Cyclical Value” factor +32.4% YTD
“Leverage” +22.7%
“Short Interest” +8.4%
“LT Momentum” -4.7%
“(Secular) Growth” -6.6%
“HF Crowding” -7.9%
“Quality” -8.05
“Low Risk” -18.4%
“Size” (Big-Small) -20.7%
Yes, I know the 1 week performance is very different from the YTD performance.
I’ve been positioned + cyclical, + small, + value, and lately also + cash, so I am pleased to read comments such as Charlie M’s.
However, it’s worth thinking about how that positioning could be wrong.
Some possibilities:
1) cyclical is overbought (yup but that’s getting taken care of),
2) cyclical is overvalued (nope, another 20-50% to go depending on name),
3) stimulus won’t stimulate (short-term effect, how $1400 gets spent was never going to matter beyond a few weeks),
4) rising rates will knee-cap 2H21 econ recovery (seems unlikely that 10Y at – gasp – 2% is enough to knee-cap anything but an unlucky hedge fund, but jury’s out I suppose),
5) Covid will knee-cap recovery (that’s the Euro lockdown fear, investors can now obsess over every wiggle in data to guess if US lockdown is next),
6) rising rates or other will cause something in the black box of options/risk parity/vol trading/etc to come “unstuck” with broad effect (very hard for one not inside the black box to see that coming, so next best is to interrogate every market move to guess if those are unsticking sounds we hear)
I think the B of A survey respondents put Covid in the rear view mirror too soon. The virus remains able to muster a fourth surge, and if that happens it will be more of a threat to portfolios than another 25 bp on the 10Y. I used to be on that panel, and I’d have left Covid at the #1 risk spot.
Good color