Year to date, Equities have seen $231 billion in inflows vs. a mere $16 billion inflows into Bonds funds. The S&P500 has averaged +25% so far this year and the Eurostoxx +20%; can you really blame the investors for piling in? With indices up this much, there has been no need to perform individual stock analysis, go through balance sheets, or pay higher management fees to invest in hedge funds that have underperformed against their benchmarks. After all Central Banks around the world have been throwing money continuously into the system; a car that is constantly breaking down but the owner refuses to fix the real problem, instead decides to throw more money at quick fixes just so it can keep running a bit longer. This tail wind of liquidity has certainly helped, as Equities are cheap as an asset class especially vs. Bonds. But when fundamentals and economic momentum no longer justify the risk reward, it is time to pull your foot of the gas, not let greed drive you and reassess your profits.
There are several fundamental and technical indicators that now show extreme positioning. The ratio of bulls to bears is at an all time high, which previously has indicated pullbacks and consolidation in the market. The Citigroup Economic Surprise Index is now showing a diverging trend where Macro numbers are coming in below expectations, yet the Eurostoxx is making new highs everyday. Corporate net buying has slowed to zero (from 3% of market cap); even companies believe there is less value in their own Equity near term? Global earnings revision ratios have underperformed the pick up in global manufacturing new orders. The market now assumes the Fed tapers much later in 2014 and has taken a dovish stance. The taper is a matter of when not if. Even the latest Fed statement suggested how risks to the outlook have receded; if the Fed tapers earlier, the market is certainly not tee’d up for it.
It’s time to consider the merits of the “easy” consensual long Equities trade. To grab the last 2-3% returns for your portfolio, is it really worth being the last man standing?
