When you think about it, it’s somewhat remarkable that equities are still perched near record highs.
After all, the last several months haven’t exactly been smooth sailing. Q1 witnessed what, by some measures, was the death of the four-decade bond bull, and the attendant mini-tantrum in rates marked the beginning of the end for the stratospheric rally in various manifestations of “froth.”
2021 can also boast of a destabilizing short squeeze so dramatic it prompted hearings on Capitol Hill and what, by many accounts, was the biggest margin call of all time, with the latter responsible for some $10 billion in losses for some of the world’s largest financial institutions.
In May, stocks stared down another daunting challenge as inflation surged the most in a decade (and the most since the early 80s on the core gauge), threatening additional losses for frothy corners of the market and, at worst, an unwind in all things duration-linked. As of this week, you could throw in a crypto collapse for good measure.
And yet, here we are, loitering within striking range of records (simple figure, below).
US equities are “withstanding waves of macro- and idiosyncratic- shocks,” Nomura’s Charlie McElligott said Thursday, noting that “despite the post-CPI inflation scare causing a systematic deleveraging in a number of legacy ‘long Equities’ positions across CTAs and mechanical exposure reduction from Vol Control / Target Vol… we nonetheless remain only ~2.5% from all-time highs in SPX.”
He also mentioned the “rolling waves of speculative capitulation [and] liquidations in crypto, meme stocks, unprofitable tech and high valuation names” seen over the past several weeks.
Read more: The Thrill Is Gone
To be sure, there’s plenty to worry about. But if none of the above (indeed, not even the combination of the above) was capable of forcing anything more than a brief correction in the Nasdaq 100, one wonders what kind of macro shock is capable of delivering a real body blow to the broader market.
I should be careful to note that some benchmarks haven’t escaped this year’s drama unscathed. The Hang Seng Tech gauge, for example, is a walking nightmare and the MSCI China fell into a bear market earlier this month (figure below).
But considering all that’s happened, and taking into account the rather shrill cacophony around the prospect of runaway inflation in the world’s largest economy, 2021 could be going a lot worse.
Even the explicit mention of a taper discussion at “upcoming meetings” (in the April Fed minutes) was shrugged off Thursday. “The bond market may have been too willing to glom on to the idea of possible changes in Fed policy yesterday,” Bloomberg’s Alyce Andres wrote. “The ensuing sell-off has been reversed today amid good demand mostly in the back-end of the futures curve.” That helped bolster tech shares.
In the same Thursday piece cited above, McElligott noted that rates vol “is again getting ‘mushed.” “Despite the ‘inflation overshoot and taper pull-forward’ meme, the Fed has remained steadfast in [its] ‘transitory’ messaging which, along with their own scar tissue from the last ‘tightening tantrum’ in 2018, likely makes this very well-socialized current version an excruciatingly slow process from the Committee,” he remarked.
McElligott flagged a few additional bullish inputs/developments even as OpEx and a big gamma drop-off loom. Traders are still conditioned to sell rich vol, he said, noting that VIX ETNs’ Net Vega continues to precipitously decline on monetization into the Vol spike.” Meanwhile, CTA buy trigger levels are closer than sell triggers in both the Nasdaq and the Russell 2000 after last week’s purge left positioning cleaner.
Finally, there’s the vol control universe, which is poised to start adding exposure assuming a well-behaved market (figures, below, from Nomura).
So, having survived every macro shock thrown its way in 2021, benchmark US equities came out largely intact and are now looking ahead to summer.
If everything goes according to plan, we’ll realize the economic “renaissance” thesis as a (partially) vaccinated, maskless public armed with what we’re told is “excess” savings, ventures out to eat, drink and be merry in a suddenly reopened economy.
That should catalyze more hiring as the services sector needs employees to serve all the daiquiris and guacamole. Oh, and corporate profits are going gangbusters, prompting strategists to lift forecasts (figure below).
I’m going to resist the temptation to employ that worst and most overused of all cheap, closing clichés.
You can fill in the blank, though.