With the S&P making new all time highs on a daily (and hourly) basis, and the VIX just why of all time lows, one has to look hard to find something that is amiss with the "market." Which is precisely what SocGen's Andrew Lapthorne did recently, and in his latest report he warns that global indices hitting all time highs is "disguising an underbelly of trouble."
Laphtorne notes that global equity markets continue to move higher, with both the MSCI & FT World Indices hitting all-time highs last week and the S&P 500 specifically hitting a new closing high on Friday. So all would appear to be rosy in the equity market with the consensus promising higher EPS growth in 2017 and bond yields remaining reasonably well behaved despite higher headline rates of inflation and a very slightly more hawkish tone from the US Federal Reserve.
However, the SocGen strategist warns that if one scratches below the surface of these headline numbers and all is not as it seems.
First example: out of the 1,650 MSCI World stocks only 246 have hit a new all-time high this year.
Second, and more troubling, example: the average stock is still 26% down from their all-time highs or down 20% when measured on a median basis. But given that it is the heavily weighted stocks (think Apple, Amazon, Facebook, JP Morgan and Alphabet) hitting all time highs, the index headline is concealing a considerably higher number of laggards.
For the investor this might be quite appealing, Lapthorne observes, as despite the headline index highs, there are plenty of depressed stocks out there potentially set for a rebound. But of course median (unweighted) valuations are also near all time highs, so valuations have already shifted higher, and we would also point out that the number of companies not making a profit remains elevated.
Alternatively, as Bloomberg noted earlier when discussing hedge fund liquidity and position crowdedness, "as money flocks to popular names, the window of escape gets smaller... it’s no coincidence that in each of the last three years, the low point of liquidity all came within three months of a market selloff. Last time it was as low as it is now in July 2015, the S&P 500 suffered the worst decline in four years the next month."
“Their ability to sell in the marketplace is really going to depend on their peers who are trying to sell at the same time,” Stan Altshuller, chief research officer at the analytics firm, said by phone. “It becomes the prisoner’s dilemma.”
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A final observation from SocGen: "the stock universe we use to create the chart shown below is large, encompassing some 15,000 developed world listed equities, with around 4,500 listed both in Europe and the US. As such, it is a far broader measure of corporate prosperity than the headline indices we typically focus on." Remarkably, of this universe, some 40% of US companies (1,700) are still currently loss making (i.e. have negative net income), "a fact you won’t be aware of if you rely solely on the record breaking S&P 500 and MSCI World indices."
Of course, with the market now well and truly in "melt-up" mode, none of this meters, and as Gartman poetically put it last week, "Illogic reigns; the “Melt Up” has begun in earnest and it will stop when it stops and not a moment before." Trivial as that statement may be, it is also painfully accurate.