One of the points we have been emphasizing to clients in recent months is that US small caps are looking increasingly less attractive compared to large caps. Small caps have benefited from excess liquidity and a belief that as the US economy recovers, smaller companies, with their greater domestic focus, are the place to be. Yet price and valuations are making it more and more difficult to justify the trade.
Emerging markets are being blamed on just about all hiccups and bad surprises currently befalling the global economy and financial markets. However, this is slightly unwarranted and, in any case, not consistent with the evidence. Out of the 9 equity markets up on the month, Indonesia, Hungary, Peru, the Philippines and the Czech Republic are among them.
December is indeed a good month to be long the stock market especially in Decembers that follow strong annual returns. We have seen a couple of such analyses in the past few weeks and thought that we would chime in here.
Amid the choppy grind higher in US equities one key aspect for investors to look for is the prospect of the long-run relative bull market in small caps to end. If we look at the straight price ratio between the S&P 500 and the Russell 2000 it is now close to an all-time low (only piped by the trough in 1984).
One of the most interesting developments across speculative positioning in the past weeks has been the reversal in net positioning in US stock futures. On an unsmoothed basis speculators most recently turned net short S&P 500 futures for the first time since October 2012 (although they increased their bullish bets slightly following the non-taper at the Fed). On a smoothed basis and including positioning in Dow Jones futures, net long speculative positioning has now declined for 5 months running.
In our latest thematic report, we look at how the unconventional monetary policies of the Fed et al are having distortionary effects on asset markets and increasing their inherent instability. In the classic film The Italian Job, Michael Caine berates…
Most of the talk on US equities is still centered around whether and when the Fed will start scaling back its asset purchases (let alone start raising rates). The point here is of course that if the Fed decides to remove the punchbowl, equities will take a dim view.
Judging by the comments from most analysts and commentators, global equities are the place to be and equity markets are still doing well. This is certainly true if you look at Japan, but in general it is not exactly correct. On a 1 month basis, even the otherwise resilient S&P 500 is now flat and many stock markets are down significantly. Indeed, despite widespread investor optimism we are now seeing broad based weakness on a monthly basis.
With the US stock market continuing to grind out new highs, some commentators have cast doubt on the usefulness of so-called macroeconomic surprise indices as a tool for predicting the market. To add weight to the argument, these commentators even include the proprietary holders and creators of the indices, Citigroup.
We would certainly agree that looking at any one tool will always give false signals and lead to poor predictions. The ongoing divergence between a negative macroeconomic surprise index and a rising 3 month change in the S&P 500 is not a good short term sign for the stock market.