You don’t hear many bearish arguments for U.S. stocks these days from the likes of Wall Street strategists.
As ConvergEx Group chief market strategist Nick Colas puts it, “A bearish take on U.S. stocks is about as fashionable as a beehive hairdo at the moment.”
In that spirit, Colas presents the “real bearish case — that the current market trend to the upside is at an end and we’ve seen the highs for 2013.”
“Here’s what that looks like,” writes Colas in a note to clients:
Myth: U.S. stocks still seem cheap-ish based on 2013 earnings expectations of $US110/share for the S&P 500. That works out to a 15.5x multiple on current earnings, and stock have room to go much higher. How high? Maybe 18 times that $US110, or 2000 on the S&P 500.
Reality: Yes, current estimates for S&P 500 earnings sit at $US110/share. Want to know where they were in January 2013? Try $US112/share. How about a year ago, for 2013? Try $US115. And in March 2012? Yeah, higher… over $US118. The bottom line is that the S&P 500 isn’t going to earn $US110/share. Maybe it will be $US108. Or maybe $US107… So what do you want to pay for every-diminishing earnings expectations? Hint: It isn’t 18x earnings. It might not be 16x, or where we are today.
Myth: U.S. stocks will grow into their earnings expectations as the U.S. economies recover.
Reality: OK, this one might be true. The problem with the assumption is that U.S. equities have the reputation for being the only game in town at the moment. European economies excluding Germany are still deeply troubled. Emerging markets look risky and in some cases politically unstable. Japan’s monetary policy experiment isn’t yet showing strong results. So what happens when the U.S. economy does accelerate? This will potentially drag the rest of the world with it, making those capital markets look more attractive. So much for the only game in town.
Consider the following: of the $US35 billion in money flows into U.S. stock ETFs thus far in the third quarter of 2013, $US15 billion has landed in one product: the SPDR S&P 500 ETF. The SPY is now the largest ETF in the U.S. capital markets at $US157 billion and represents one out of every 10 dollars invested in U.S. listed ETFs. This isn’t an endorsement or a refutation of the product. The point is that the appetite for U.S. stocks appears to be heavily concentrated in the most liquid index even when other equally efficient options actually have better returns (i.e. Russell 2000).
Myth: There’s still plenty of worry warts out there who haven’t bought U.S. stocks and will need to fill up the tank as equities continue to grind higher.
Reality: Real money doesn’t always trade volatility, but when they do they prefer the VIX. OK, needless pop reference, I know. But consider that the CBOE VIX Index closed today at 11.8. I know that “15 is the new 20” for the VIX, meaning that its long run average of 20 is really more like a 15 reading today. And that’s fair enough with easy monetary policy and a reassuring central bank helping the case. But an 11-handle is just 3 points away from all-time lows for this measure of market expectations as they relate to near term volatility. There are some seasonal factors at play here — August tends to be lower volume and volatility for U.S. stocks — to be sure.
Consider, however, that we also had a wide-ranging terror warning from the U.S. Government over the weekend in anticipation of threats related to this week. Where would the VIX have closed without that caveat? A 10-handle? Nine something?
“The upshot of these observations on the VIX and other factors is that you might still be able to make a decent return between now and the end of the quarter in U.S. stocks, but you need to believe that there are no speed bumps on the way,” says Colas. “Stocks are the only game in town for now. So as long as you want to go along with that rosy assessment, you should be all good.”
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