The US Equity Market Has Never Done This Before

Three charts to consider ahead of Monday’s post-Government-Shutdown open.

VALUE

The S&P 500 is trading at a Price-to-Sales ratio of 2.35x… a new record high for valuation…

GREED

The S&P 500 is up 8 of the last 9 weeks, 16 of the last 19 weeks, and 15 of the last 15 months (and 22 of the last 23 months – since The Shanghai Accord). This has pushed The S&P 500 to an RSI of 88.4… a new record high for overbought…

FEAR

The S&P 500 has averaged about four 5% declines – from peak to trough – annually since 1927, but volatility in US stocks has evaporated in recent years. Amid a reportedly robust global economy and still supportive global monetary policy, Friday’s 0.4% gain meant that the S&P 500 extended its streak to 395 days without a 5% reversal… a new a new record for tranquillity…

As The FT notes, the last time the S&P 500 suffered a 5 per cent setback was in the global market carnage that followed the UK’s shock vote in June 2016 to leave the EU, which constitutes the last significant, if brief, bout of volatility in markets. The last time the US stock market suffered an actual correction – typically defined as a drop of over 10 per cent from the recent peak — was in early 2016, when investors’ anxiety grew over the state of China’s economy.

Some investors and analysts fear that the tranquillity is encouraging investors to stop buying protection against declines, or to making aggressive “short” bets on volatility staying low through complicated derivatives – which could exacerbate any turbulence that might erupt.

Underscoring the combination of ebullience and simmering fears, Bank of America Merrill Lynch’s latest investor survey indicated that most fund managers think the bull market will continue into 2019, but said that “short volatility” was the most crowded trade in markets.

“The short volatility trade remains strong – even though it is a huge potential risk,” Mark Tinker, a fund manager at Axa Investment Managers, noted this week. “Keep an eye on low volatility,” he urged, “it’s less a sign of complacency and more a sign of too many people chasing income and selling volatility.”

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So The S&P has NEVER been this over-valued, NEVER been this overbought, and NEVER gone this long without even a minor correction.

Never… is a very long time…

(P.S. we guarantee that mainstream business media will be inundated with charts/data proclaiming that US equities actually outperform during periods of government shutdown… so any dip should be bought… trade accordingly).