RBC: "The Model Can Not Explain This", Warns Market Regime Has Changed Suddenly

Another day, another warning from a major bank (after Goldman, Citi, and most recently JPM, and various other smaller research providers), this time from RBC's macro strategist Mark Orsley, who in his latest note writes that that something has dramatically, and suddenly changed in the market in recent days, as confirmed by bank's macro model provider. To wit:

There is another interesting force at play in equities that deserves to be flagged. The good folks at QI (our Quant macro model provider) flagged to me that their r2 on SPX has been falling precipitously. This means their model which incorporates hundreds of different factors is now unable to explain why S&P's are moving. Previously the main drivers of S&P's were well explained by 1Y forward earnings estimate, inflation. growth. credit spreads, energy prices, and real rates but that is no longer the case. That means S&P's are going through a regime change and typically when the r2 falls this way, it is a red flag and caution is warranted.

Mark Orsley's take:

"I think Putting together the breakdown in EM last week, the breakdown in high yield credit, and the regime change in S&P's you have to have a much more defensive posture in risk assets for the first time since the election. My  premise is this is entirely due to the move in rates especially in real rates. I recommend some sort of downside protection."

That said, so far every attempt to correctly call the downward inflection point in this rally has failed to see corresponding follow through, as the retail "animal spirits" remain confusingly unquantifiable, at least for now.


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