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Behind The Scenes Of Wall Street’s V-Shaped Recovery
Higher now, lower later.
That's been the equities refrain from Nomura's Charlie McElligott for the
Buy backs suppressing volatility = wave ’em in, boys.
Notice the absense of any mention about earnings and “valuations”. Neither matter anymore.
This concept is very hard for most people in the stock market to accept. Especially those who were steeped in the theories of Graham Dodd and such or among the loyal followers of Warren Buffet. For two reasons:
1) valuation models seem to be a map to navigate the chaos of the markets. It is human nature to seek out explanatory models for everything in life, not just stock prices.
2) For share analysts, they help justify our JOBS and careers. How do we earn our six+ figure salaries if the main drivers of share prices can be boiled down to market volatility, momentum and fund flows? Asset managers NEED to be able to pass out 60-page neatly bound “decks” covering economic trends and valuation pictures, usually they are backward looking. Order in the chaos.
This also helps explain the widespread aversion to passive investing and, to some extent, how poorly “value” investing and active management have fared in recent years relative to simple passive strategies and fee compression.
What’s left for the active manager? Perhaps it is being able to identify new investment themes such as weed, mRNA, glp-1s and AI. Our job is to identify and pile into them early and know when to take profits. To do so, at the start one has to ignore or shrug off nosebleed valuations. Detecting when others start to notice that the companies are not “growing into” share prices at 100 times sales becomes important when trying to figure out when to reduce or exit a trade. For a recent refresher, call up a five-year chart of CRSP.
In a nod to an obscure money reference, Things Change. Ignoring that puts raises equity managers at further risk
Be careful what you wish for, you may receive it!
@derek, very true for shorter time frames (days, weeks, months); on longer time frames (months, years, decades) the “fundamentals” get increasingly important.
So what’s an old-fashioned meat investor to do? Security selection still matters for relative performance within a market allocation, and much of that still turns on fundamentals. Picking is the funnest part of the six-figure job anyway 🙂
AI may be coming for that part of the job too, a lot of which is pattern recognition and media consumption anyway. I think that in time, both meats and passives will cede share to AI investing. Think of the latter as a combination of quantitative investing and mindshare investing – everyone will have their own unholy lovechild of AQR and ARKK in a box, continuously trading 2500+ name portfolios in 24/7 dark pools. In non-taxable accounts, hopefully.
Nothing will change but the faces. “There always were and always will be the same percentage of winners and losers”.
JL – Remember the supply & demand aspect of it. Share buybacks reduce the float of a share. They sometimes get paused, but rarely reversed.
Very true. Stocks have a natural upwards tendency. Buybacks, real economic growth, inflation, and share gains to the rich apply to companies as well as to households. See, what we do is not for naught!
Over the past 15 years the reduction in supply via buybacks has been the dominant force underpinning share prices.
Earnings growth? Recall the Golman piece issued around 2019 showing that the equity rally over the previous ten years was solely driven by P/E expansion because aggregate corporate earnings during that period were flat like a pancake.
Money has to go somewhere so it was and has been buying into a shrinking pool of equities. Scarcity value!
Not to be overlooked is how various purveyors of illiquid private equity and credit has been trying to tap into retail investors. The last pool of money. “”Last” because major pools of funds are already stuffed to the gills with that garbage. Even Gulf State fund managers no longer can be counted on to buy everything they are shown!
I was taught with Graham and Dodd. My doctoral mentor was a co-founder of the CFA society and wrote all the tests for many years for those seeking CFA certificates. My first full time teaching job was teaching this stuff and I served as an expert witness in court offering my opinions about asset valuations dozens of times. Here’s what I know now after 50 years, value is a hoax! There are prices for each moment in time but no actual values, just guesses. The first time I went to testify as an expert, the man handed me a Bible an asked: “In the testimony you are about to offer do you promise to tell the truth, the whole truth and nothing but the truth, so help you God?” The hair instantly stood up on my whole body. Since that testimony was about an asset value I knew instantly there was no truth … , so help me anyone. I was paid more than enough money over the years to pay for my daughter to get three degrees and put money down on three houses. Except for debts there’s really no such thing as an actual value, just prices for transactions. That’s why I own very few equities. Bonds, loans, etc. are contracts involving legal promises. Equities and so-called “real assets” make no promises, have no honor and no souls. They have no discernible values. I get active management only on selected fund investments. The rest is fee-paid guess work.
Pragmatically and empirically, though, equity prices tend to rise . . . over time . . . and price returns + dividend returns tend to beat interest returns . . . over time.
H-Man, so buy backs thrive for as long as equities rise, when equities fall, buy backs ??? Place your wager.
H-Man, a down market (no emphasis on tariffs, tax bill, energy costs, inflation, Iran, interest rates or Ukraine) seems somewhat in the cards. Unless, of course, I missed the good news!
“Driving equities perversely higher to the chagrin of top-down macro bears. . . .”
That’s certainly how it feels, no?
So everything is great now?
– war ended or paused anyway, barely dented risk assets
– Fed shifting toward cut, investors think inflation benign by July FOMC, if not then cut must be nailed on for Sept
– Vol falling back, portfolio positioning still light, systematics buying
– 2Q reports should look like 1Q, companies that were going to guide cautious or pull guide have already done so
– macro data warning signs during 2Q ignored, need outright hard data headline breakdown to impress
– no fear about July 9 or really about tariffs at all because TACO
Complacent summer ahead, feels like. Setup for eventful fall. Maybe I just think this because it suits the vacay plans.