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On The 'Uniqueness' Of 2012's Equity Performance

Tyler Durden's picture





 

Credit and equity markets (should they avoid a catalcysmic year-end slump back to reality) are heading for much better results that one might have expected. As JPMorgan's Michael Cembalest somewhat passive aggressively notes, this year looks to be a reward to those who stuck to normal investment allocations despite the macro issues in play, and despite low global economic growth.

One way to visualize 2012: the red dot in the chart, which shows global GDP growth and equity market returns each year since 1970. There’s normally a connection between growth and equity returns, with the exception of the dots in the box, which are low-growth equity rallies. If we remove post-recession rallies and rallies based on significant interest-rate declines; what we are left with is the conclusion that 2012 is kind of unique: a low-growth year with double-digit global equity returns not based on a recession rebound or a bond market rally.

The only other was 1998. Of course, a huge factor this year was the European rescue. What about 2013?

 

Without the usual catalysts for a low-growth rally, a stronger recovery in global growth would probably be needed to generate similar equity returns. As things stand now, the pieces are in place for a modest improvement in growth in the US, China and EM Asia, but less so in Europe and Japan. At first glance, a 3% global growth rate would match up with high single-digit global equity markets returns in 2013.

A fiscal “grand bargain” in the US could result in multiple expansion which would drive returns higher. Multiples of 13.6x on the S&P 500 have room to rise before becoming overpriced (at least from a historical perspective).

How likely is this “grand bargain”? Recall the Republican Presidential debate in which some candidates pledged to eliminate or seriously constrict the Environmental Protection Agency. A proposal like this2 reflects the fact that after the Budget Control Act, there really isn’t that much non-defense discretionary spending left for politicians to fight over (by 2017, it will be at the lowest level in 50 years).

On government spending, the grand bargain is mostly about cutting entitlements, which runs counter to voter sentiment.

 

Source: JPMorgan

 


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Thu, 11/29/2012 - 20:08 | Link to Comment Mr Lennon Hendrix
Mr Lennon Hendrix's picture

How does the "stocks are not in reality" meme fit in with the other memes "the dollar has no intrinsic value so who gives a shit what a stock is valued at?" and "the bond market is owned by one Ben S. Bernanke and is just a joke"?

How can there be any price discovery at all?  How can we discern anything if the above notions are true?

Thu, 11/29/2012 - 20:36 | Link to Comment fonzannoon
fonzannoon's picture

Mr. L we are cruise control from here until the brick wall.

Thu, 11/29/2012 - 20:55 | Link to Comment Kitler
Kitler's picture

With a very fat finger on the resume acceleration button...

Thu, 11/29/2012 - 20:53 | Link to Comment game theory
game theory's picture

The fed is willing to play chicken with everyone holding cash in bank accounts.  Everyone keeps asking about the fed's insanity...but for as much as everyone hates them, they've broadcast all their moves.  I am betting that this game of chicken ends with negative rates. I can't wait to see what happens to velocity then.

Thu, 11/29/2012 - 22:15 | Link to Comment Confundido
Confundido's picture

"...There is a very interesting document from this period, a letter from Sir Austen Chamberlain, who was then Foreign Secretary in London, to M. Poincaré, who was Prime Minister and Finance Minister in France; it must be of 1928. Sir Austen said, “We know that you are entitled to ask gold for your sterling, but in the frame of the close friendship between Britain and France we ask you, so as to avoid trouble for the City of London, not to do that.” And we were, I must say, weak enough to comply with this request and not ask for gold. The fact that I had such important sterling deposits in London shows that we did not use this right to ask for gold. The adjustment, which would hardly have been felt if carried out on a day-to-day basis, was not made, and we had the fantastic boom of 1927, 1928, and 1929. This explains the depth of the collapse and of the depression, because the adjustment was so long delayed..."

 

There is a very interesting document from this period, a letter from M. Trichet, who was then the European Central Bank’s President, to Mr. Bernanke, who was the Chairman of the U.S. Federal Reserve; it must be of 2011. M. Trichet said, “We know that you are entitled to ask dollars for your currency swaps/euros, but in the frame of the close friendship between the European Union and the United States we ask you, so as to avoid trouble for the European Union, not to do that, and receive Euros instead.” And we were, I must say, weak enough to comply with this request and not ask for dollars. The fact that we had such an important U.S. dollar bond market in the Eurozone shows that we did not use this right to ask for U.S. dollars. The adjustment, which would hardly have been felt if carried out on a day-to-day basis, was not made, and we had the fantastic boom of 2012. This explains the depth of the collapse and of the depression, because the adjustment was so long delayed.”…

Fri, 11/30/2012 - 00:27 | Link to Comment ReactionToClose...
ReactionToClosedMinds's picture

very good ..... and then there was the rumors of the German-Austrian economic union, in contravention of the WW1 Versailles Treaty that precipitated the drawdowns (i.e., bank run) on Creditanstaldt.   Credit & currency ....... as Disney's The Sorcerer's Apprentice, Mickey Mouse in Fantasia was thinking ... what could go wrong

Thu, 11/29/2012 - 20:21 | Link to Comment stocktivity
stocktivity's picture

My outlook for 2013....More Bullshit with some Horseshit thrown in.

Thu, 11/29/2012 - 20:33 | Link to Comment buzzsaw99
buzzsaw99's picture

cows shit too but they don't brag about it

Thu, 11/29/2012 - 20:53 | Link to Comment Comay Mierda
Comay Mierda's picture

same shit different flies

Thu, 11/29/2012 - 20:33 | Link to Comment game theory
game theory's picture

just wait until the fed starts buying equities...hello upper left quadrant.

Thu, 11/29/2012 - 20:48 | Link to Comment NotApplicable
NotApplicable's picture

That's what I was thinking.

Bizzaro World, FTMFW!

Thu, 11/29/2012 - 20:50 | Link to Comment Kitler
Kitler's picture

It is sadly just a matter of time.

Remember B.S. Bernandspankme has already promised to print until bank profitabil... er... employment improves.

Thu, 11/29/2012 - 20:53 | Link to Comment Comay Mierda
Comay Mierda's picture

using GDP since 1970 without adjusting for the changes in the CPI calculation methodologies (happened around 1980 and 1990 to suppress reported inflation) renders this graph meaningless.  no apples to apples comparisons among data between 1970-1980, 1980-1990,1990-today

if the CPI calculation methodology remained unchanged during the last 40 years, the GDP deflator would be much higher, and GDP would be much lower.  then this 2012 equity return data point would be an extreme outlier to the top left.  in fact, most of the points on this graph would shift left.

one would conclude that equity returns are ignoring the underlying economic reality once true CPI is used (pre-1980 methodology).  

Or as i see it, investors are dumping their dollars to pile into equities to hedge a tsunami of inflation they see coming, and have seen coming for a while.

stock market returns lately are basically a vote of no confidence in the dollar, and all other credit-based fiat currencies that are slowly returning to their intrinsic value of 0.00000000

Thu, 11/29/2012 - 21:24 | Link to Comment RopeADope
RopeADope's picture

Why would you even use CPI to adjust GDP? That is akin to picking 1 person out of a crowd of 1000 who ends up being asian. Then adjusting GDP by asian. You should be adjusting GDP by the entire crowd of 1000.

Thu, 11/29/2012 - 22:24 | Link to Comment RopeADope
RopeADope's picture

No, adjust GDP by global broad money supply not some academic masturbation number.

Thu, 11/29/2012 - 22:05 | Link to Comment Cursive
Cursive's picture

And the fed funds rate started 1998 at 5.25 and ended at 4.75%.  I realize Benron is using QE now that we have ZIRP, but QE doesn't generate high powered money a/k/a the transmission mechanism.

Fri, 11/30/2012 - 01:06 | Link to Comment EZYJET PILOT
EZYJET PILOT's picture

What about endless QE lifting the stock market, we didn't have that in 98, f@cking retarded bankers, I can't believe what I'm reading here.

Fri, 11/30/2012 - 08:11 | Link to Comment CowboyzFan
CowboyzFan's picture

Whether or not GDP data is reliable, seems to me the red diamond on that chart should be a half inch lower.  Just saw a pebblewriter chart that shows a 10% correction by around year end.

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