The bad news is, pervasive uncertainty around “the macro backdrop” — a polite euphemism for the rolling supply shocks associated with two misbegotten wars of choice — is preventing the world’s risk asset benchmark par excellence from summitting more new peaks.
The good news is, should that macro uncertainty recede, benchmark US equities can notch new highs in Q4 on re-positioning flows.
That’s one way to spin a plunge on a Goldman indicator which rolls up nine measures of equity positioning across the two-and-20 crowd, institutional investors and retail types.
As the figure above shows, that metric’s now the lowest since March, which is to say indicative of the least aggressive equity positioning since the early days of Donald Trump’s “special military operation” in the Gulf.
Note the dashed grey line. The current reading, while low, isn’t extreme. If it’s a screaming contrarian “buy” signal you’re after, this ain’t it. But, as alluded to above, it does suggest scope for investors to dial up their exposure in the event — for example — Trump decides to accept some version of the Iranian ceasefire offer he turned down last week.
As Goldman’s Ben Snider put it, there’s “clear room for investors to add length if the macro backdrop becomes friendlier.” Just so there’s no confusion, “macro backdrop” is code for the geopolitical environment, and “friendlier” means lower oil prices and, as a happy consequence, lower rates vol.
In the meantime, the specter of successive Fed hikes to combat an inflation impulse emanating in the first instance from the supply side (i.e., a problem the FOMC can only address indirectly, by curbing demand and/or deliberately undercutting the wealth effect through a controlled demolition of equity prices), is doing some damage below the surface.
The figure above shows you Goldman’s main breadth indicator: The difference between the index’s distance to its 52-week high and that distance for the median stock.
“While the S&P 500 trades just 1% below its record, the median S&P 500 stock trades 16% below its respective 52-week high, push[ing] our preferred measure of market breadth to its lowest level since the dot-com bubble,” Snider went on.
That’s the same point Snider’s counterpart at Morgan Stanley made on Monday, when Mike Wilson cautioned that although stocks can muddle through regardless, the disconnect between a resilient index and deteriorating internals “needs to reconcile before the bull market fully resumes.”
Coming full circle, it’s all about the war, crude and rates. “The macro backdrop,” as it were. “Our expectations remain that the [Iran] conflict will be with markets for the foreseeable future and the global economy will continue adjusting to the realities of supply disruptions,” BMO’s Ian Lyngen sighed, as oil rose pushing yields higher again. “Such a backdrop implies that energy prices will be biased higher, or at least the floor for any selloff has increased unless and until there’s a durable agreement to reopen the Strait, which seems a distant ambition at the moment.”
Late Monday, oil reversed course on headlines suggesting Trump’s open to sanctions relief for Iran in the event of material progress towards resolving the impasse over the country’s nuclear program. Never a dull moment.
