This year’s selloff in stocks during the month of May looked a lot like last year’s May selloff, and it was driven by a lot of the same macro concerns.However, Adam Parker, Morgan Stanley’s chief U.S. equity strategist, wrote in a note to clients this morning that even after the recent selloff, his team’s “models do not indicate extreme risk aversion or capitulation among US equity investors.”
Capitulation is when stocks sell of so much they become cheap and attractive as new investments.
There are three differences this year that Parker highlighted in the note.
First, Parker says that quality stocks outperformed junk stocks by only 2.1 per cent during the selloff of the last two months. Last year was a bit different in this regard. Parker:
During the comparably-sized equity market decline in June – December 2011, quality beat junk by 8.4% on a risk-adjusted basis. Since quality-junk spreads are tightly linked to risk aversion, this is evidence that investor risk aversion has not reached high levels in the current sell-off.
This chart illustrates the disparity in the spread between 2011 and 2012:
The second difference from last year: analysts’ earnings estimates have held up remarkably well during the recent selloff, which was driven by compression in valuation multiples as opposed to downward revisions. Parker says that “revisions, estimate dispersion and up-to-down revisions were less effective in 2011 than they were recently,” and that Morgan Stanley’s quantitative models currently point to 2013 earnings “nearly 17% below the current consensus.”
Finally, value stocks have done well in May despite the selloff. Parker notes that May 2012 marked the best monthly performance for value since August 2011. He notes that “outperformance of value stocks is a hallmark of mid- to late-stage risk-seeking periods, rather than risk-averse periods.”
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