Risk Premium

Why Morgan Stanley Thinks Stocks "Will Do Worse Under The New Administration"

"Returns will likely do worse under the new administration than under the departing one, and where exceptions to this may be. That statement is linked to a simple idea. Good market environments often involve a shift from economic despair to optimism, and a shift in psychology from ‘fear’ to ‘greed’. Both occurred over the last eight years, producing returns well above the long-run average."

Goldman "Concerned" As Risk Appetite Index Hits Record High

Speaking at a conference in London, Goldman MD Christian Mueller-Glissmann warned investors, "valuations are at very high levels. And that concerns us when it comes to making progress in stocks, unless you maintain a very high level of optimism." The firm's aggregate risk appetite index reached record highs in December - the same peak reached in 1999/2000 and 2007... and we know what happened next.

Hugh Hendry: "We Are Running A Trumpian Portfolio"

  • In Europe we anticipate further duress in the political commitment to the European project as the success of Trump’s economic stimulus plan keeps US growth humming
  • The combination of Trumpian economics and Japanese 10-year nominal yields being trapped at zero by the Bank of Japan should mean the yen continues to weaken.
  • And finally, there are Chinese trades which generate positive carry should the status quo persist yet remain long volatility should pressure on the renminbi intensify

Forget Italy, Turkey Is The Main Course

While investors are focused on Italy, Bloomberg's Mark Cudmore warns that another Mediterranean country is poised to grab their attention very soon. A currency crisis in Turkey is rapidly deteriorating, setting the stage for dramatic and unscheduled central bank action.

Goldman's Bear Case In 7 Steps: "We Are In The 98th Percentile Of Historical Valuations"

"S&P 500 valuation is stretched relative to history on nearly every fundamental metric. At the aggregate level, the S&P 500 index trades at the 85th percentile of historical valuation relative to the past 40 years. For portfolio managers, the more important fact is that the median S&P 500 company trades at the 98th percentile of historical valuation."

Goldman Raises S&P Target To 2,400 On "Trump Hope"

"Hope" will dominate through 1Q 2017 as S&P 500 climbs by 9% to 2400 according to a just released revised forecast by Goldman Sachs. The firm adds that "instead of our baseline adjusted EPS growth of 5% to $123, growth could accelerate to 11% and reach $130, which would support a P/E multiple above 18x." However, Goldman warns that "Fear" is likely to pervade during 2H and S&P 500 will end 2017 at 2300, roughly 5% above the current level.

How Far Can Bond Yields Rise Before Hurting Equities? Goldman Answers

"... we believe that the equity market is still at a level that can cope with moderately rising bond yields. We estimate that a rise in US bond yields above 2.75% or probably between 0.75-1% in Germany would create a more serious problem for equity markets: at that point we would expect that any further rises in yields from there would be a negative for stock returns." - Goldman Sachs

Goldman Reveals Its Top Trade Recommendations For 2017

  • Top Trade #1: Long US$ vs GBP and EUR
  • Top Trade #2: RMB weakening: Long $/CNY
  • Top Trade #3: Long BRL, RUB, INR and ZAR, short KRW and SGD
  • Top Trade #4: Long Brazil, India and Poland, FX un-hedged
  • Top Trade #5: Long 10-year US$ and EUR inflation
  • Top Trade #6: Long EURO STOXX 50 2018 dividends

Goldman Warns Of "One Of The Largest VIX Dislocations On Record"

The VIX has increased on nine consecutive sessions, a new record; and the term structure of SPX implied volatility is now steeply inverted, pricing in a potential wide swing over election week. However, as Goldman Sachs notes, although the VIX is up, the market hasn’t actually been moving that much and that has led to one of the largest VIX dislocations on record. In fact, VIX has overshot its typical beta to the SPX by 5 vol points.