SocGen: "Fundamentals Are Always Strong When Sell-Offs Begin"

When warning over the weekend that there has been a regime change in equity markets and that instead of buying the dip investors should sell the rip, Goldman's co-head of equity trading Brian Levine countered  the traditional response that despite the "technical selloff", investor psychology remains intact with the following:

I've heard many "write-off' this correction as being technical in nature. Well, yes, that was the trigger, but if you're hanging your hat on that, you're missing the bigger picture. The market had effectively quadrupled over the past 9 years. Why? Obviously numerous variables contribute, but it would be hard to dispute that unprecedented, globally coordinated easy monetary policy was your primary driver to force investors out on the risk curve. Sure, rates have been gradually rising the past few years, which the stock market has easily digested, but there's always a threshold that sparks a seminal change. And I don't think it was a coincidence that the S&P topped out on the very same day 10-year yields made 4-year highs (a week ago Monday the 29th)....and rates have backed up a further 15 bps to 2.8% currently. The fact that bonds couldn't rally in the equity selloff is evidence of a regime change in the multi-year equity bull market.

In other words, Goldman no longer believes that one should "ignore the selloff because fundamentals remain strong."

Adding to this overnight, SocGen's Andrew Lapthorne writes that "fundamentals are nearly always strong when the market starts to sell-off." And, as the strategist adds "when markets correct, the standard retort is that in the long-term it pays to stay invested and that the fundamentals remain strong and supportive."

To determine the validity of this statement, SocGen looked at prior corrections in the S&P 500 to see how fundamentals looked at the point when the market turned. What Lapthorne found using data since 1985, is that at the point when the S&P 500 dropped 10% or more, on average the US ISM index was at 51.6 (indicating economic expansion), trailing EPS growth was on average running at 7% and forward growth expectations were at 11%.

The point being that at the top, economic fundamentals always look strong and this is why interest rates are going up. It is interest rates, not growth, that is the concern.

Lapthorne then shifts focus, and echoes an analysis conducted by Goldman's David Kostin last Friday...

... namely how long it takes to recover from your index price loss.

Here, the mild corrections in 1998 and 1999 took under 90 trading days to get back to the initial index level. This compares to the 2000 and 2007 corrections which took over 1800 and 1400 days respectively to recover the prior price level.

In such long draw down periods, the compounding dividend takes on added performance, as in total return terms although you made no money in price terms from 2000 to 2007, at least you made 12.5% via the dividend. Another good reason to avoid dividend cuts.

Finally, looking at the composition of the selloff, SocGen notes that so far we have seen very little in the way of fundamental stock price discrimination. Specifically, during the worst day of selling, we saw some of the lowest ever cross sectional stock dispersion for a down market of such magnitude.

"In brief it looks like investors were selling markets, not stocks, a fact also reflected in the initial outperformance of small-caps versus large-caps."

To Lapthorne, the next market phase is key: do markets simply shrug off the sell-off and resume business as usual, or do they start differentiating?

We’ve clearly been arguing for a while now that holding balance sheet risk in an era of rising interest rates and higher market volatility has limited upside but significant downside. That view has only become reinforced by the recent market turbulence.

So far today, they are once again "simply shrugging it off", and judging by the wholesale rip in stocks just as fundamentals were ignored on the downside, so they will be forgotten on the rebound.


spastic_colon Mon, 02/12/2018 - 09:48 Permalink

"This compares to the 2000 and 2007 corrections which took over 1800 and 1400 days respectively to recover the prior price level."

It will compare when the drawdown is equal to or greater than those periods........until then we still have 20 down points on VIX to go which will be managed until new ATH's

Branded Mon, 02/12/2018 - 09:51 Permalink

Fundamentals have had fuck all to do with shit since at least the 90s, and probably before.

It's a fucking Casino where you buy your own drinks - that's it.

How 'The Market' ever got passed-off as a retirement/investment vehicle for the Proles is the work of criminals.

buzzsaw99 Mon, 02/12/2018 - 09:52 Permalink

just because some jackass bid the s&p to 2875 or whatever doesn't mean that anybody lost money when it drops to 2650 (unless they bought the ath).

Kickaha Mon, 02/12/2018 - 09:59 Permalink

Oh, good grief!

The fundamentals are not strong.  They have not been "strong" for a decade.  You don't fundamentally change anything, except for the worse, by borrowing to maintain the same level of economic activity.  There has been 5% - 8% inflation annually for a decade, a fact to which the political administration has gone to great mendacious lengths to conceal.  Having one arm of that administration now proclaim that "inflation is on the rise" does not mean it is actually on the rise.  It simply means they have admitted they can no longer conceal the truth, but only spin it to report a current rate that is much smaller than the actual rate.

There remains massive overcapacity worldwide.  40% of the workforce is at home watching a cheap big screen TV or nodding off to an opiate buzz.  Real wages remain in decline.  As noted here at ZH, the vaunted 2.9% increase in the hourly wage in the last official statistical puke actually was prompted by about 15 states raising the minimum wage effective Jan. 1, and, even with that, weekly average paychecks declined due to fewer average hours per week.  How is that supposed to put more money in Joe Average's wallet and send him joyously off to the mall?

But the official narrative is that we now have the beginnings of a "wage push" inflation which will put more dollars in the hands of consumers and massively overheat the economy due to majorly increased demand for tight supplies of consumer goods and services.

That cannot possibly be true, so the question arises as to why the announced threat of increased inflation now dominates the financial news.

My best guess is that it is a planned cover-up of the real cause for the economic chaos to come:  money manipulation by the world's central banks.  They shall proclaim themselves to be blameless.  Hell, they will proclaim themselves to be geniuses for having saved us all from even more inflation by proactively raising interest rates to prevent the inflation rate from skyrocketing.  I can see the autobiography titles now "How I Saved the World from 20% Inflation".











Easyp Mon, 02/12/2018 - 10:10 Permalink

Most of the stocks I own have little or no debt but that did not stop them suffering last week.  This week looks better but the markets are not acting rationally and have not been since 2009 imo.

Bailing out Banks and printing money to blame!

Blue Dog enough of this Mon, 02/12/2018 - 12:02 Permalink

The market has been manipulated upward by cheap Fed money, high frequency trading, and direct buying by the Fed. All to continue the illusion that the economy is healthy.

We cashed in the 401k a year ago. Paid the penalty. Paid off the mortgage. I don't have a dime in the market.

Now that Trump owns the market and the deep state hates him you can expect a market crash with everyone blaming Trump for it. Once the crash happens you'll see money flooding into gold, silver, and cryptos.


In reply to by enough of this

NYC_Rocks Mon, 02/12/2018 - 12:54 Permalink

No, it's the central banks that kept rates artificially low and sparked the biggest debt bubble in history.  Debt it he concern, not rates.  Rates going up are the result of excess debt everywhere.  They would have increased a long time ago if central banks had not been artificially suppressing them.  Debt is out of control.  The low rates allow the large amount of debt to look ok.... for a while.