An upbeat start to the week is under threat, with stock futures falling. Some are pointing to a senior regulatory official in China who has warned of bubbles in the United States and Europe, and elsewhere.
Whether you’re unsure or at ease, our call of the dayby Julien Bittel, multiset fund manager at Pictet Asset Management, offers a piece of advice that adapts to everyone now: diversify this portfolio.
Bittel’s concerns stem in part from what he sees as no bad news being priced anywhere now. “We think that, given the speculative extremes going on today, there may be a rush to the exit similar to what we witnessed in 1987, where you know that the market could fall 30% quickly … in two months,” he told MarketWatch in interview.
In a storm of graphics, he runs through his vision, starting with stock valuations, which he notes that some overlook the view that earnings “are about to explode further”. Your chart below encompasses a range of valuation metrics that have been closely correlated with future returns since the early 1980s.
“Now what you can see here is that at the current valuation extremes, this suggests that stock returns will be around 29% less year on year, 12 months ahead,” he said. Although until March, annual returns are expected to be around 55%.
The next Bittel chart shows a composite stock valuation score – currently in the 98th percentile. “So when it is high, you know that the valuations are very expensive,” he said. Otherwise, “only 1.4% of the time, in the last 40 years, stocks have become so expensive” based on this measure.
The rise in bond yields, which has disrupted financial markets, is the topic of the next chart. “Here is the U.S. 10Y-2Y yield curve, currently 130 basis points out of the low curve reversal points in August 2019,” said Bittel. An inversion refers to when the longest maturities yield less than the shortest ones.
The last three times this happened was in August 1990, February 2001 and November 2007, and “historically, this degree of post-inversion of the interest curve results in an inflection point for the stock markets”, he said.
Compressing a few more, the next one shows the most overbought commodities since March 2008 (see 14-day relative strength index). For these assets to continue to outperform, “the dollar needs to weaken further and the momentum for global growth must surprise positively,” he said.
But he believes a stronger dollar could be a big surprise for investors this year. The chart below tracks an analog from late 2017 to 2018 and shows “the train will officially leave the station in March”.
Finally, he is concerned about this chart that shows the company’s most confident CEOs in 17 years. Like, they can’t be much more optimistic.
Two things he sees as likely that many investors do not see: a stronger dollar at the end of the second quarter and a surprising growth momentum on the negative side in the second half of 2021. “The real blind spot for me is the impact that this could have on the reflection trade, ”he said.
So, to diversify is Bittel’s advice, through a multi-set product that offers some stocks and bonds, which will benefit in times of surprising growth, but will also protect against bad things that happen.
The markets
ES00 stock futures,
YM00,
NQ00,
are falling after Monday’s bullish session. European SXXP shares,
Asian markets are on the rise, while Asian markets have ended on a low, following the bubble alert from Guo Shuqing, head of China’s Banking and Insurance Regulatory Commission. CL00 oil prices,
are lower, the DXY dollar,
is bigger, and bitcoin BTCUSD,
prices are going up.
The buzz
Target TGT retailer shares,
are rising after better-than-expected sales. In this same sector, Kohl’s KSS shares,
are advancing after their results. Information Technology Group Hewlett Packard Enterprises HPE,
will report after closing.
Zoom ZM Actions,
are growing, after the video communications group reported adjusted earnings almost 10 times higher due to the pandemic-related demand for COVID-19 for its services.
All USA Apple AAPL,
the stores are open for business for the first time in almost a year.
A senior World Health Organization official warned against declaring a victory over the pandemic by the end of this year. This is because global coronavirus cases increased for the first time in seven weeks last week.
Random readings
Singer Taylor Swift is dissatisfied with Netflix’s NFLX,
“Ginny and Georgia.”
Two fruits, three vegetables a day = a longer life.
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