Goldman Urges "De-Risking Strategies In Stocks" As Credit Tumbles

It's deja vu all over again in the US (and European) capital markets as credit markets have dramatically diverged weaker (as stocks extended gains, ignoring every risk that is thrown at them), just as we saw in January, before the February reality check... and Goldman is worried.

Over the past month, US Investment Grade credit has steadily underperformed its corresponding equities, punctuated by a significant credit widening yesterday. Despite CDX IG 5Y widening 3bps yesterday afternoon to 67bps, there was little SPX reaction and only a modest rise in the VIX

Benchmarking the divergence:

We estimate the equities corresponding to the names in the CDX IG Series 30 are up 3.5% in the past month while a risk equivalent investment in CDX IG 5Y is down 2.8% (selling protection at 12x hedge ratio).

Relative to volatility over the past year, credit has underperformed equity by 3.1 standard deviations over the past 2, 4, 6 and 8 weeks when compared to these same rolling periods over the past year.

This compares to a 2.7 standard deviation dislocation when we last wrote about a similar divergence in January.

What might this mean for forward equity returns? 

Over the past year, when credit has underperformed equity by an average of 1 standard deviation over a 2, 4, 6 and 8 week period (12% of observations), equity was down an average of -2.3% over the subsequent month. When credit OUTperformed equity by more than 1 standard deviation over a 2, 4, 6 and 8 week period on average (8% of observations), equity was up an average of 2.4% over the subsequent month.

Goldman's suggestion:

We see this difference as significant and leads us to favor de-risking strategies in equities.

And it's not just US markets.

While there has been a similar divergence in credit and equity in Europe (exhibit below), the divergence is less notable in our opinion because European equity has traded down on an absolute basis.

This suggests European equity investors are already focused on the risk and the debate is about magnitude rather than direction. US equity investors are, in contrast, bidding up stocks despite this growing international concern.

Simply put, there is a higher potential for equity investors to recognize European issues as a threat to global growth than for US credit investors to shrug off European risks as irrelevant for US companies.


LawsofPhysics Fri, 06/08/2018 - 09:27 Permalink

It's a fiat currency fractional reserve "mark to fantasy" world folks...


...meanwhile in the real world you must have real resources and consumable calories if you want to do or make real shit.

Oddly enough it's the useless paper-pushing fucks in banking and finance that are still being overcompensated...

Oh well...

"Full Faith and Credit"

same as it ever was!

small axe Fri, 06/08/2018 - 09:39 Permalink

create the risk, de-risk the risk, ad infinitum...just like politicians creating the problems and then "solving" them. GS and DC, I can hardly tell them apart.

Al Huxley Fri, 06/08/2018 - 09:47 Permalink

They're not as reliable a contrarian indicator as Gartman, because they're smarter, and know that fleecing the sheep effectively means keeping them confused, so sometimes they'll provide information that's accurate in a given timeframe and context.  Me, I'll wait for my Gartman indicator before taking any action.

shizzledizzle Fri, 06/08/2018 - 09:54 Permalink

Oh risk off is it now bitches?!

A. They are on the other side of the trade

B. They have already closed positions and the muppets won't make it to the exits.

mo mule Fri, 06/08/2018 - 10:03 Permalink

Just a bunch of crooks, these are not markets, these are crooked price sets by the banks. So the banks can have it, I quit. No more trading for me, let the banks trade against each other, they can eat each other. Fvk'em...........LOL

NoWayJose Fri, 06/08/2018 - 10:29 Permalink

Yup - a lot of people know Goldman is on the other side of the trade - we just have to figure out if they are short and are trying to get lemmings to sell so the price goes lower, or if they are trying to get the lemmings to short so they can get squeezed later.

arrowrod Fri, 06/08/2018 - 12:23 Permalink

One standard deviation! What does that even mean?

Tyler wrote this (maybe).  Doomsday porn.  Means Monday the DOW will be up 400 points.  (Er, in financial doublespeak, doesn't points mean dollars?)

CVT!  (IBM doublespeak for the Communications Vector Table.  The pointer all of the good stuff in a mainframe.)  Fuck Yeah, acronyms.