Why I exited my remaining equity positions today
Bull-market pricing in a bear market
The S&P 500 is currently priced like we're still in the 10-year bear market. We're well above the 10-year upward-sloping trend line, and we also ended today right on top of the 50-month moving average. We're also well above the 2019 lows. This probably isn't sustainable, however, because just about all the analysts agree that we're in a recession.
Why is the market rallying so strongly?
The market is rallying because the government's measures to stave off a financial crisis have been truly legendary. Worried about corporate debt? The Fed has pumped trillions of dollars in loans into the financial system so companies can pay their old debts with new debt. Worried about household mortgages? Many people who lost their jobs will make more money on unemployment, thanks to Congress's stimulus package. Worried about commercial mortgages? Small businesses get free money to pay their rent, and banks are giving out rent holidays. Worried that business closures might last too long? Trump has promised to lift lockdowns by Easter.
In short, the efforts to keep the debt bubble from popping have been so Herculean that at this point it's hard to see how they could fail. It's like that scene in The Big Short when the shorters realize they've "bought into a rigged game," and CDOs might not be allowed to fail. Only the efforts to keep debt from failing this time around have been far larger and have come far faster than in 2008. The US government may have been a month too late to contain coronavirus, but they acted a lot faster to contain the failure of bad loans. In many ways, the market rally is justified.
Can the rally continue?
In my opinion, this rally has played itself out. There remain at least a few important sources of risk that make a surge past the 50-month MA unwarranted.
1) Oil prices may collapse to $10 per barrel as storage space runs out.
2) State governors may not play ball with Trump's plan to end quarantines early.
3) Dividend cuts and suspensions may change the value proposition on many equities.
4) Earnings may continue to be revised downward, especially for banks that are giving loan payment holidays.
5) Even if the US ends quarantines early, quarantines abroad may prove a continued drag on the global economy.
The S&P 500 is currently priced like we're still in the 10-year bear market. We're well above the 10-year upward-sloping trend line, and we also ended today right on top of the 50-month moving average. We're also well above the 2019 lows. This probably isn't sustainable, however, because just about all the analysts agree that we're in a recession.
Why is the market rallying so strongly?
The market is rallying because the government's measures to stave off a financial crisis have been truly legendary. Worried about corporate debt? The Fed has pumped trillions of dollars in loans into the financial system so companies can pay their old debts with new debt. Worried about household mortgages? Many people who lost their jobs will make more money on unemployment, thanks to Congress's stimulus package. Worried about commercial mortgages? Small businesses get free money to pay their rent, and banks are giving out rent holidays. Worried that business closures might last too long? Trump has promised to lift lockdowns by Easter.
In short, the efforts to keep the debt bubble from popping have been so Herculean that at this point it's hard to see how they could fail. It's like that scene in The Big Short when the shorters realize they've "bought into a rigged game," and CDOs might not be allowed to fail. Only the efforts to keep debt from failing this time around have been far larger and have come far faster than in 2008. The US government may have been a month too late to contain coronavirus, but they acted a lot faster to contain the failure of bad loans. In many ways, the market rally is justified.
Can the rally continue?
In my opinion, this rally has played itself out. There remain at least a few important sources of risk that make a surge past the 50-month MA unwarranted.
1) Oil prices may collapse to $10 per barrel as storage space runs out.
2) State governors may not play ball with Trump's plan to end quarantines early.
3) Dividend cuts and suspensions may change the value proposition on many equities.
4) Earnings may continue to be revised downward, especially for banks that are giving loan payment holidays.
5) Even if the US ends quarantines early, quarantines abroad may prove a continued drag on the global economy.
Comment:
The rally does indeed look like it's over. I'm surprised it went on as long as it did, given the jobless claims numbers and the drop in oil prices yesterday. But I suspect it was driven partly by short-covering and portfolio rebalancing, plus maybe a little bit of FOMO. However, the rally's failure won't be confirmed until we fall back below the 10-year trend line. For the moment, we have support there.
Comment:
Maybe this will underscore how we're still priced like we're in a bull market.
Bear market pricing is 12-15 forward P/E, as during the 2009-2013 recovery from the 2008 recession.
Bull market pricing is 19-22 forward P/E, as during the optimistic 2015-2019 period.
Based on current EPS estimates, forward P/E is now about 19.5, a bull market price.
Bear market pricing is 12-15 forward P/E, as during the 2009-2013 recovery from the 2008 recession.
Bull market pricing is 19-22 forward P/E, as during the optimistic 2015-2019 period.
Based on current EPS estimates, forward P/E is now about 19.5, a bull market price.
Comment:
While the S&P 500's price moved upward today, here's what December 2020 S&P 500 dividend futures did.
