It’s Amazing We Haven’t Had Another Crash

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.

Speak your mind

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11 thoughts on “It’s Amazing We Haven’t Had Another Crash

    1. I marvel at those who yap on the net about having to deal with our horrible fiat currency, the dollar, not backed by hard assets and isn’t that awful … And then those same people load up on stocks backed by absolutely nothing except the “greater fool theory.”

  1. The strength and resilience of the bull market is not surprising, considering that:
    – The US economy is a quarter into a powerful rebound/recovery surge that will probably last through year end (reasons: vaccination, stimulus, profits recovery, etc)
    – In a few months the Eurozone will accelerate into its own recovery (similar reasons as US), followed by major parts of the developing world (ditto plus commodities exposure).
    – There is a lot of cash yet to be invested (institutions, PE, SPACs, and whatever mattress keeps funneling big inflows into ETFs each month – frankly, the world is awash with cash that “needs” to be invested)
    – Financial conditions are very easy (an understatement, perhaps) and governments are spending bigly and are not about to stop soon.

    Yes, there is froth and ridiculous exhibitions of manias, memes, margin, everything that makes grizzled, cynical market observers want to dive into a foxhole. In the most egregiously overbought assets, there are corrections and outright meltdowns (SPACs, crypto, meme, lockdown winners). Rapid rotations from style to style as the hose of money inflow tries to find somewhere to go. The main US indicies look to be rounding over. It’s also May, as in “sell and go away”.

    But nothing in my second paragraph changes what was outlined in the first paragraph.

    When on the beach, what do you keep your eyes on: the body of the incoming wave, or the froth and splash on the crest of that wave? If you don’t want to be knocked off your feet, probably the body of the wave.

    I think that betting big against the market – other than super-short term bets, for those who are good at that – is pretty dangerous when the wave has just started to rush in.

    At some point, the wave will run out of energy and start receding. This rebound/recovery surge won’t last too far into next year, I wouldn’t think – not in the US, anyway.

    When hoarded inventories are getting dumped at deep discounts, the triple orders cancelled, the stimmies gone, the bills for unpaid rent and forborne mortgages come due, Home Depot starts comping -25% against the crazy “base effects” of 2021, then I will guess we won’t be talking about “froth” or “inflation” or “mania”. We’ll be assessing the “new normal” and how good, bad, or middling it looks.

    When does the market start discounting the post-rebound US new normal? I don’t know – late 2021 maybe? I doubt we’re seeing it yet, when there is so little clarity or consensus on what the post-rebound new normal is.

    If the Eurozone is 4-6 months behind the US, and the Covid-slammed areas of the EM behind that, does that mean their markets outperform from here? I don’t know – but certain ones have already started looking better than the US indicies.

    I don’t worry much about what the FAANMGs or lockdown winners do, or what memes or cryptos do – other than their potential for triggering a market “accident”, and their potential to bleed money back into other assets, of course.

    Here is a fun exercise. Build a reverse DCF model, that estimates implied terminal growth based on current valuation and consensus cashflows for the next few years. Point it at different sectors and industries. You’ll find lots of names with market-implied “long term growth” that is less than inflation, less than 1%, even negative. Then apply your preferred quality, dividend, whatever screens to weed out the companies that are, indeed, somewhat likely to flatline or worse in the coming decade. There are some. For example, can you really be confident that CVX won’t be a negative grower from 2025 onward? If not, then move on to the next name.

    You’ll find there is a lot to own, that yields 2-3X the 10 year UST even if long term growth is in fact as punky as market prices imply, and has double digit upside if long term growth turns out to be low-single-digits on a nominal basis. It’s kind of boring stuff, maybe. That’s okay.

    1. Well said,Thank you. Now would be a good time to take a deep breath, read the wave and pick your ride.
      Last June and this June are completely different worlds. Covid is still killing but we have much to be grateful for.

  2. To be honest, I’d like a deeper dive in the rotation aspects.

    Take the NDX 100. Not doing too badly, considering. Yet ARKK or even the NYFANG+ got their asses kicked. So who is going up, to make up for those losses in mega tech and unprofitable hyper growers? And that’s within tech/NDX100. Not even talking about SPX or broader market…

    1. The easiest way to look at this, I think, is to pull up a chart of relevant ETFs or indicies.

      For style, you can compare RLG-RUX, ELV-RUX, RDG-RUX, RMV-RUX, RUO-RUX and RUJ-RUX, these being the Russell growth and value indicies, starting with Large cap and ending with Small cap. Or, USMV VLUE QUAL MTUM, these being factor ETFs.

      For size, RUI-RUX, RMC-RUX and RUT-RUX, these being Russell Large, Mid and Small.

      Chart them relative to SP500 for easiest viewing.

      1. You can also download a list of the NDX100 or SP500 constiuents and their 1, 3, and 6 month price change. Add the starting market cap and you can see change in market cap by sector and thus kind of see money flows. For SP500,

        Last 1M: Biggest sector mkt cp gains: Finance 31BN, Energy 10BN, Healthcare 10BN, Industrials 8BN. Biggest sector mkt cap losers: Tech -19BN, Utilities -3BN, Consumer Srvcs -2BN.

        I guess you could normalize this against the overall mkt cp increase in SP500 too.


    An article last month goes into a theory that index funds and passive investing are creating a dangerous market where nothing matters because mega funds don’t react to anything, ever.

    John Coates argues that “in the near future, just 12 management professionals-meaning a dozen people, not a dozen management committees or firms, mind you-will likely have practical power over the majority of US public companies.”

NEWSROOM crewneck & prints