One of the many “mysteries” of recent US equity strength is the solid performance of speculative, long duration stocks in the face of the ongoing bond selloff and attendant rise in real yields.
Nominal yields are the highest in years, the Fed will be in “full-hawk mode” for the foreseeable future and yet, rate-sensitive equities are a semblance of buoyant.
A Goldman basket of non-profitable tech is up more than 30% since mid-month, and a sector-neutral long duration basket more than 20%, for instance. The simplest example of this ostensibly counterintuitive mini-trend is just the Nasdaq 100 rising alongside real yields (figure below).
According to Goldman, the explanation is straightforward enough. “Leveraged investors have participated in the current selloff by aggressively reducing their equity exposure,” the bank’s David Kostin wrote, in his latest, flagging a 50% reduction in CFTC net futures length, a steep drop in margin balances and GS Prime data showing “sharp” reductions to hedge fund leverage in 2022.
That de-risking likely set the stage for a squeeze. “Short covering by these participants helps to explain why some of the longest duration equities have recently risen in the face of rising interest rates and a more hawkish Fed,” Kostin said.
The figure (below) illustrates the point.
In addition to short covering, retail activity has picked up, with animal spirits stirring anew in some “prototypical meme” names, as Goldman put it.
So, what about “regular” investors? That is, what about market participants who aren’t institutions and aren’t compulsive gamblers either? Well, according to Goldman, they’ve adopted the “diamond hands” strategy of the crypto crowd. Not only are they holding through the storm, they’ve been busy “actively buying the dip,” Kostin said.
Consider that over the past two decades, a 10% drawdown in US equities was typically accompanied by a $10 billion outflow from US equity funds over the dozen weeks following the peak. Not this time, though. Instead, US equity funds raked in $93 billion over Q1 which, to Kostin, suggests “households have continued to buy” following a quarter-trillion spree in 2021.
How could that be? After all, growth momentum is waning and Americans are experiencing the biggest cost of living shock in a generation. A look back at stagflationary periods in the late 60s, early 80s and early 2000s shows equity allocations generally fell. As Kostin put it, “household demand for equities is typically weakest when GDP slows, inflation accelerates, or interest rates rise [and] a combination of these has proven especially challenging.”
But this time is different. Households are sitting on $4 trillion more in cash assets than they were pre-pandemic, and guess who holds more than half of that cash? The rich, of course! And the top 10% of the wealth distribution isn’t affected by inflation the same way the bottom 90% is, if they’re affected at all. That’s the K-shaped inflation dynamic (again).
The read-through is that $2 trillion of the surplus “dry powder” accumulated post-COVID may be “deploy[ed] into equities,” Goldman said, on the way to reminding investors that even though yields are much higher YTD, “cash and fixed income products continue to offer low yields in absolute terms and limited return potential” compared to stocks.
Meanwhile, there’s always the corporate bid. Have a look at the figure (below) which, albeit the furthest thing from surprising, is nevertheless remarkable.
Buyback authorizations are on track to top 2021’s record $1.2 trillion. Goldman now expects gross buybacks to reach $1 trillion this year, up from $870 billion.
On net, corporate equity demand should total $700 billion this year, also record, Goldman went on to say. Between them, households and corporates will buy $850 billion in US stocks in 2022 on the bank’s estimates, offset by $900 billion in net selling from pension and mutual funds.
Goldman described the household-corporate equity demand nexus as “diamond hands and buybacks.”
3 thoughts on “‘Diamond Hands And Buybacks’ To Drive Stock Demand: Goldman”
Re: “full-hawk mode” for the foreseeable future and yet …”
The pandemic can be viewed as a war or tsunami wave or hurricane that was a shock to global economies.
About mid March, I thought a depression was possible, primarily because of crashing markets and uncertainty, but, in hindsight, that early period was more like an early warning alarm alerting everyone to prepare.
In terms of economic shocks, this was different than 911 at least in regard to how the Fed was very early in taking drastic actions, before any systemic damage “really” took place.
That’s what I find interesting in retrospect, because with the housing crisis, there were years of fraudulent activity building in layer upon layer of systemic deception. As the housing bubble grew, people were in denial, but after the tsunami hit, it was easy to see the damage. It was understandable that the guy across the street that didn’t have an education or decent job might go into foreclosure. That mess was tangible.
The trump economy and his GDP promises didn’t pan out well, but overall, even though things were oddly managed, the economy wasn’t strong but it wasn’t entirely struggling. A lot of low wage jobs were created and taxes cut…
Thus, I think the problem, somewhat related to this Mr H story, is the irrational hyperactive way the Fed engages itself, to the point of usurping control of free markets.
With the Fed at the wheels of a vehicle, they reacted to the pandemic as if they were propelled by a rocket, versus being somewhat cautious and curious. Politically, there was some foot dragging, but the general theme was to go big. However, all that thinking was somewhat based on the framework of the GFC, and I think that’s why we’re in this mess today.
I think there was an expectation that the GFC recipe could fix the pandemic, and thinking that no matter how much money was fed to the pandemic, everything could go exactly as planned, like GFC.
Obviously, the pandemic was structurally and systemically different. To make a long story very short, the Fed is back at the wheel, going from rocket mode to slamming on the brakes as hard as humanly possible. The whiplash effect of too fast to the current abrupt stop is probably why some financial instruments seem fine while others are broken. Metaphorically, in this Fed ride we’ve taken, a lot of good things happened really fast and then a lot of things were broken.
The Fed seems to have done all they could do to prevent a depression, but ultimately I think there was a lot of pressure to prevent a recession and force a V recovery, which caused longer term instability today and paved the way for a delayed reckoning. I think the Fed being hyperactive added to pandemic chaos.
It still bugs me, that in a way, stocks and wall street sorta sidestepped the reality of a major global shock, it’s as if economically a massive amount of debt was swept under the rug and the good times rolled, while millions died. It’s hard to reconcile, so just wanted to think about that.
I wonder how debt servicing could derail the repurchase goals.
Also, pension plans will become stock sellers and bond buyers as bonds continue to sell off. Could private hands absorb what the pension plans are selling?
Many many years ago i (from the privacy of my arm chair decried to the thin air my pension fund managers increasing equity allocations and reducing fixed income holdings. Well I mentioned it to my my wife too. But, hell the whole point of my end of that employment contract was based on a pension that was different more conservative from most other govt pensions out there. I do not know what the future holds, but boy was i sure wrong in that lonely declaration into the nicely textured wilderness.
When i research a potential investment that voices the mere squeak of a social/retail variable. I is probably out.
On the other hand people (memer’s) should know that diamonds can be shattered, all it takes is a hammer.