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互联网 2021-04-10 22:44:56

From Nicholas Colas of DataTrek Research

Today we offer up a list of 5 negative scenarios for US/global equities. In no particular order: 1) markedly higher interest rates, 2) below-expectation US consumer spending, 3) heightened geopolitical risks once militaries/non-state actors are vaccinated, 4) US Big Tech regulation and 5) a raft of better investment opportunities that take capital away from global equities. We’re still bullish because we believe fiscal/monetary policy more than compensates for expected value of these downside scenarios.

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Today’s Markets topic is "What could go wrong in US/global equity markets over the next 12-24 months?" As much as we’re still positive on risk assets, it always pays to consider the downside case.

Five scenarios to consider:#1: The easiest negative argument for stocks is also the simplest: materially higher interest rates begin to hurt equity valuations.

Back in the 1980s, the Shiller PE for the S&P 500 was 15-20x when 10-year Treasury yields were 8-9 percent. That PE is now 30-35x in large part because yields are 1.5 – 2.0 percent. Even though the S&P today is dominated by stronger companies (Big Tech has big moats) now than in the 1980s, higher discount rates will absolutely hurt equity valuations. Maybe not a lot, but everything in capital markets happens at the margin.

Future Federal Reserve policy is also a potential pitfall. Yes, Chair Powell has promised to keep rates low, but that can’t go on forever and markets know that. That’s why we focus on 5-year Treasury yields as an early warning sign. Keeping Fed Funds at zero for the next 2 years means very little if there’s a series of 50 basis point rate hikes in the offing during 2023 – 2024.

Summary: higher rates will come because of higher inflation and, while there’s good arguments on both sides of the “low vs. high” debate, in the end “higher inflation/rates” is a very real possibility. It has been decades since that was the case, and how badly equity markets respond to this new framework is very hard to predict.

#2: US consumers’ spending patterns prove less predictable than consensus expectations.

There’s a “roaring 20s” analogy making the rounds which posits that the 2020s will resemble the post-WW I 1920s, but that’s a fundamental misreading of history. Wartime, for all its horrors, is typically a period of full employment. The 2020 pandemic era was certainly not that. Further, in the 1920s the US repaid several large war bond offerings which spurred both consumer spending and stock market speculation. While that may sound familiar, there was virtually no consumer debt at the start of the roaring 1920s, unlike today.

The more correct analogy might be to what the Great Depression did to US consumer psychology: increasing the propensity to save and shunning unnecessary debt and expenses. Much of the market’s enthusiasm over future earnings increases relies on the US consumer returning to pre-pandemic form as soon as they are able. Being long the US consumer over the last 40 years has been a great bet, to be sure. But simply assuming that everything will quickly return to the status quo ante is potentially a serious blind spot for markets.

Summary: the weight of the global post-pandemic recovery rests entirely on the US consumer. Europe is in no place to shoulder any of that load, and China is not running its 2010 playbook. Markets think they have this call down pat, hence the recent rally to new highs. At a +21x forward multiple on the S&P 500, they’d better be right.

#3: The end of the “Pandemic Peace Dividend”.

As long as the virus was circulating around the world and there was no proven vaccine, no country could sensibly consider large scale military action. First, putting thousands of people in close contact would spread the disease. Second, every medical professional was needed to treat virus patients and that included military doctors and nurses. Now that vaccinations are underway, countries and non-state actors can inoculate military personnel and execute Clausewitz’s “diplomacy by other means”.

Summary: geopolitical risk is always out there, but last year it was forced as far to the sidelines as it has been in decades or perhaps even centuries. How, if, or when it comes to the fore is always hard to predict, but 2021 – 2022’s odds of a geopolitical shock are materially worse than 2020’s.

#4: Tech regulation/index concentrations.

Large Cap Tech + AMZN, FB, GOOG and TSLA is 38 percent of the S&P 500 and 35 percent of total US equity market cap. The industry faces a very unfriendly US/global regulatory environment at the moment, even if stock prices say otherwise.

China presents a cautionary tale on this count. The MSCI China Index is down 16 percent from its February highs. Leading that decline are Tencent and Alibaba, which are each down 17 percent and have a collective 29 percent weighting in the index. Note that they are not really underperforming. Rather, the Chinese government’s sudden increase in tech sector regulatory scrutiny is hitting overall investor confidence.

Summary: markets are relying on Big Tech’s phenomenal profitability to fully offset the business risk created by stronger regulation, but that has not worked in China so it’s valid to ask if it will insulate US tech stocks once Washington gets in gear on this issue.

#5: Winning ideas may not be the “right” ideas in terms of index-based investing.

For example, which would you rather own for the next 2 years:

The virtual currency that begins with “B”, or a major global stock market index like the S&P 500, MSCI EAFE or Emerging Markets?

A newly IPO-ed Coinbase, or JP Morgan? Even though Coinbase is very profitable, it won’t be in the S&P 500 for a year due to seasoning requirements. JPM is 1.4 pct of the index right now.

PayPal, or the S&P large cap Financials sector? PYPL is just 0.9 pct of the S&P; Financials are 11.2 pct.

A basket of late-stage VC-funded disruptive tech companies, or the NASDAQ 100 (QQQs)?

Summary: there’s no shortage of capital in the world, but there’s also never been a greater variety of places to put it.

Virtual currencies alone are a $2 trillion parking lot, and the recent NFT craze shows this ecosystem can still pull in fresh capital. We’ll likely have a record year for US IPOs, but none of them will hit the S&P 500 until 2022 at the earliest. In other words, a lot of financial assets can do well without the S&P seeing any benefit since correlations typically remain low during the middle part of an economic recovery. In fact, capital may leave US stock indices looking for greener pastures elsewhere.

Pulling all this together: the goal today was to present 5 reasonable bear cases and let you decide how likely they might be. From our perspective, they’re all valid to some degree and others (like US tax policy) may not be as discounted in stock prices as we think. Ultimately, we’re still positive on US stocks because we believe fiscal and monetary policy plus corporate earnings leverage offsets these potential outcomes sufficiently to make the risk-reward calculus favorable. Put another way, the expected return from policy actions is greater than the expected return of the risk factors we’ve outlined today.