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Goldman 'Explains' This Is Not A "Low Quality" Rally, It Is "Macro-Free" - So Don't Worry
It appears even Goldman Sachs was surprised by the recent rally in US equities - especially in light of the explicit hawkishness of The Fed yesterday. In a trading note this morning, the bank says that market risks are real and rising (but are not overwhelming) as it explains, we assume with no intent at humor or sarcasm, that they "prefer to think of the recent equity rally as 'macro-free' rather than 'low quality'," reiterating their view of the cycle and of markets as "fundamentally upbeat." They do, however, admit over the last month, the likelihood of a drawdown in the US equity market further increased, and remains at mildly elevated levels.
via Goldman Sachs,
Market risks: real, but not overwhelming
Despite worries from some that recession risks are on the rise, equity markets continue to recover from their late-August drawdowns. The S&P 500 has recovered around 9pp relative to the trough on August 24 and now stands less than 2pp below its all-time high from five months ago. Chinese equities have seen a similarly good performance over the last two months, breaking a three-month-long slide and recovering some lost ground, although they remain well in the red year-to-date. European equities are also up, after bottoming slightly later relative to other parts of the world.
Our view of the cycle and of markets remains fundamentally upbeat, and we continue to focus on three pillars of support: strength in the service sector, and accommodative monetary and fiscal policy. So, in some sense, we see the resolution of late-summer worries as consistent with our view of the market landscape. Yet, there are still lingering risks and sources of concern. If these resolve, they could provide a further boost to assets, but if they intensify, they could jeopardise gains. Below, we briefly discuss three specific risks: the perceived low quality of the recent rally, a heightened likelihood of equity sell-offs, and the continuing trend of macro data weakness.
Markets recover from the late-summer swoon without much help from macro
In our conversations with clients, a phrase 'low-quality rally' is often mentioned. To a large extent, we think this may be too harsh a judgement, and would argue that 'low-quality', 'risk-on' and 'macro-free' may be close to synonymous. Perhaps not surprisingly, the current rally mirrored the preceding decline. After the August sell-off, we argued that the decline was largely a 'risk-off' move without much macro backing (see Global Markets Daily: Bull market interrupted, September 3, 2015). The same can be said about the recovery. The 'fear factor', as represented by the VIX index, is sharply down, and broad equity indices, including the S&P 500, China and, to a lesser extent, Europe, are up. But most of our growth gauges, including global growth, US domestic growth and European growth, are either flat, or lower. This mostly extended their lukewarm moves during the August sell-off, as it was similarly broad-based and without distinctive macro content. And our measures of the 'macro focus', or the portion of the cross-section of market returns explained by macro factors, is also in the low range relative to history, suggesting that recent market shifts were not motivated by changing views of the macroeconomic landscape.
As Noah Weisberger has discussed, there are some signs that the equity market may be re-focusing on pricing the view of growth a bit higher. If this trend continues, it is possible that some of the hard-hit and still-lagging baskets, including Wavefront Consumer Growth basket and Wavefront Housing basket, may recover some further ground.
Likelihood of drawdowns remains elevated
Market drawdowns are characterised by sharp and swift repricing of the market lower, and the August episode was a textbook example. We argued in the past that these episodes – often broad-based and with little or no macro profile – tend to be relatively short-lived, and followed by periods of relatively steady recovery. In a recent Global Economics Weekly (see Life after a drawdown, October 7, 2015), we presented a simple model for estimating a likelihood of a drawdown within a given month, based on the measure of global growth, realised market volatility, the level of financial conditions and occurrence of drawdown episodes in the proximate past.
Over the last month, the likelihood of a drawdown in the US equity market further increased, and remains at mildly elevated levels (see Exhibit 1). But contributions to this estimate from the factors that participate in the model were mixed. Financial conditions and volatility both eased, and this should have eased the likelihood of a drawdown as well. But global growth (as measured for example by our GLI index) deteriorated further in September, pushing the likelihood of a drawdown higher. And, finally, the fact that there was a drawdown episode in a nearby month also hurt prospects of a drawdown-free month.
There are three aspects of this observation worth underscoring. First, without another drawdown episode, one of the factors that drove the probability estimate higher – the presence of a drawdown in the proximate past – will mechanically disappear with the passage of time. Second, our near- to medium-term view of global growth calls for a gradual stabilisation, and not a substantial further deterioration. If this view materialises, improvements in the GLI's growth and acceleration will help reduce the likelihood of repeated market corrections. And third – and harking back to the notion of 'a glass more than half-full' – is our oft-repeated observation that, over last two years or so, market swoons turned out to be opportunities and not harbingers of lasting market damage (see Exhibit 2).
Growth should stabilise despite ongoing macro data weakness
Both risks described above – the perceived 'low quality' of the recent rally, and the heightened likelihood of equity market drawdowns – are to some extent a consequence of a relatively weak macro data picture. But, here too, there are some mitigating factors. First, as discussed by Francesco Garzarelli in yesterday’sDaily, the weakness is mostly concentrated in the manufacturing sector. Indeed, the most recent read of GLI components suggests continuing strength in consumer confidence, and the US labour market remains robust. Second, there are some faint signs both of US macro data improvements, and also the market’s reaction to these improvements over last few weeks. Finally, our economists' view remains that global growth will stabilise and, in particular, that US growth will remain at around 2.25%.
* * *
So have no fear American investors, despite nothing behind this rally, keep buying (or holding) - because the professionals need someone to sell to...
As you will notice the only "net buyers" of equities have been "individuals," while "professional" firms have been "net sellers." This is the epitome of the classic "smart money/dumb money" analysis where individuals are used by institutions to offload positions that are no longer optimal.
The question is with corporate profits and earnings declining, weak economic data, and the threat of tighter monetary policy - will individuals once again be left "holding the bag" while institutions derisk portfolios in advance of the next decline?
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God, thank you for imparting your wisdom on me.
Bum, meet fuck.
Noah Weisberger
lulz
Do the opposite they say. Then we might have a chance.
that was a real zynga
translation
We are surprised that the s&p s over our year end target. We are positioned for this and it could go higher . if youd like we have some service sector stox to sell
Remember the 3-D relationship : Deflation, Derisk and Decline
Any GS "swirl-o-grams"? Haven't seen those for a while.
Let's grab Lloyd on his bathroom break, up end him in a toilet, and flush repeatedly.
I'm sure we can duplicate a good 'ole swirl o gram, no problem.
Or, at least have a lot of fun watching him eyeball the turds as they roll by, looking for a clear shot at breathing.
In ten days it might rain, but it might not.
Either way - you owe me a fucking fee, got it?
Tell him the good part.
The good part is that no matter whether our muppets make money, or lose money, Duke & Duke get the commissions.
Irrational exuberance springing from mildly excessive lenience in mathematical application of statistical analysis of false data with anticipation of endless free money.
most important story all day IMO:
Gap between U.S. and German two-year yields at widest since 2007- Reuters
http://www.reuters.com/article/2015/10/29/eurozone-bonds-idUSL8N12T4T220151029
Certainly no risk that the Fed will raise rates by any meaningful amount, if at all, anytime soon.
I wonder what Goldman's earnings call is like. Do they openly laugh at their stupid clients?
http://webcasts.com/GSEarnings
According to GMP Securities:
http://docdro.id/iEpNjQ7
Squaring a hawkish Fed, a rising USD & a strong equity market rally
We find the market’s reaction to the FOMC’s October release to be surprising. After selling off in the minutes following the release, the market rallied back to close above its pre-release highs. In our view, there wasn’t much to find bullish in what was clearly a hawkish release. By eliminating references to global risks and introducing the “at its next meeting” language, the Fed has set the stage for a potential December rate hike. The FOMC’s finger is now on the button - the only question is whether the resolve is there to press it.
In the rally from the late September lows, equity market investors had generally convinced themselves that the Fed would remain on hold until well into 2016. A run of softer economic data lent support to this argument. But the Fed’s release made it clear that its next move is to raise rates and that barring a serious downturn in the economy (not just a soft patch), the Fed will move soon – our call is December.
The DXY is testing the top end of its recent range…
Currency markets appear to be embracing our view. The DXY has rallied to the top end of its 94 to 98 trading range and rallied again on today’s FOMC release (Fig 1). A break through par on the USD would indicate a renewed up leg in the USD and is in our view entirely possible in the event of rate hikes in the US combined with further QE in Europe and/or Japan.
A new DXY up leg would not support further equity market gains
We have been perplexed by the S&P500 rally in October in the face of further US dollar strength. The DXY has been up by >10% YoY for all of 2015 (range 10% - 25%), with the current YoY increase being 14%. Our analysis suggests that large up or down moves in the DXY are strong indicators of weak or strong equity market performance, but small moves (< 10% up or down YoY) have no material impact on equity market performance (Fig 2). When the DXY is rising by 10% or more YoY, equity markets typically gain only 0.7% annualized. A strongly rising USD is a significant headwind for equity markets to overcome. If the DXY breaks out, this headwind could persist well into 2016. If not, the YoY increase should fall below 10% by year end.
We can’t recall a time when equity investor sentiment on monetary policy was so out of sync with what the FOMC appears to be saying. In our view, this disconnect, combined with the recent rally and significant rise in investor optimism in October, suggest this is a time for caution.
Pimping their "buyback" desk much?
LOL.... it is real simple. People just want to BTFD!
I suspect there are some knotheads from China and Europe using this to funnel money out of their corners of the world.
Bonds are definitely weak: I've been watching the market for awhile, wanting to get short on any bond rally but they've been MIA.
Gold is weaker than I expected in the face of softness in the dollar, but that's okay because I am accumulating, at the moment.
Stocks are off a bit but should be getting sold harder...makes me want to add to shorts, but I probably will not do it as the pain is still too recent. Not trading until morning, anyway.
Uvol-Dvol and advance-decline have both been ugly lately, in fact basically all internals look like absolute shit. Despite major internals being negative all day the machines have pushed us back up to unchanged and with the standard 3:30 buying panic starting now they will probably even close this shit show green again today.
Im not buying it. Fuck that noise, if Goldman likes em so much here they can have em. Go ahead and load the boat here if you think everything is so awesome. As for me, I am all set not owning stocks at these levels.
The air is getting pretty thin up here.
Nope, PTT did not get it green. But being short (which I am) ain't for sissies, that's for damn sure.
Macro-free is an odd way of saying counterfeiters market.
It suggests that the BOJ is diworseifying into USA ETFs as well as hoovering up all the local Japanese ETFs. What happens when the BOJ owns all the ETFs on the entire planet???
The USA has to apologize for Hiroshima and Nagasaki?
They ought to decree stock prices and be done with it. Why not, currency, commodity and consumer product prices do get set by decree from time to time (see the recent scandal with toxoplasmosis medication). Its only fair.
Jail those who trade at different prices.
"The question is with corporate profits and earnings declining, weak economic data, and the threat of tighter monetary policy - will individuals once again be left "holding the bag" while institutions derisk portfolios in advance of the next decline?"
It isn't any different from any other time. Individuals will always loose. You can't beat the manipulating cronies. Although I sure as hell hope they will loose it all one good day. :)