Is everybody getting a trophy in the current market environment?
In the US-Listed ETF Flash Flows report from State Street Global Advisors, Matthew Bartolini, head of SPDR Americas Research, writes how what once appeared to be the “endgame” for the longest running bull market in history has now been replaced with a rally in which everything is moving higher and “everyone is getting a trophy.“
“The notion that ‘everybody gets a trophy’ is derived from the rules of American T-Ball,” Bartolini explains. “There are no outs and everyone gets to bat at least once. No one keeps score and all baserunners advance one base at a time. It’s just a game of singles and every five-year-old running after the same ball – the earliest sign of return chasing, perhaps.”
April saw the fourth straight month of gains for global stocks. This was the longest winning streak since January 2018 pushed 72% of global equities to trade above their 200-day moving average – a reversal from how the year began, when only 23% of stocks were trading above their 200-day average, according to Bartolini.
Stocks continued to rally to new highs and investors sought to take on more risk in hopes of capturing further upside.
In addition, the S&P 500 Index and the NASDAQ Composite Index are once again trading above all time highs, Bartolini points out.
Another characteristic of this “everybody gets a trophy” market is the change in the volatility regime, according to Bartolini.
The CBOE VIX Index (VIX) has averaged 15.5 over the past four months, down 26% from the fourth quarter’s average of 21.9. Also, Bartolini notes that the S&P 500 has had just 15% of its trading days with a daily price move greater than 1% in either direction in 2019, down from 25% of its days in 2018.
“When everyone reaches safely, it’s no surprise that risk is low,” Bartolini writes.
According to Bartolini, this complacency is apparent from the price investors are paying for next year’s earnings compared with current levels of volatility. That ratio now sits in the 76th percentile of the last 10 years, up 30% from the start of the year, he adds.
However, Bartolini does point out that not everyone will get a trophy despite the double-digit gains.
“That only happens in T-Ball, and this isn’t T-Ball,” Bartolini writes. “This is the big leagues, where macro data can ride in on the hands of hitters jamming any power stroke, and earnings misses can buckle a batter’s knees like when Clayton Kershaw introduces them to Uncle Charlie.”
With this in mind, Bartolini suggests keeping the following three ideas in mind during this late cycle game that keeps getting extended.
Bartolini’s suggestion is to stay invested with equities but target inexpensive firms with sustainable cash flows and quality balance sheets to mitigate slowing margins.
Bartolini says to make sure bonds acts like bonds – providing diversification, stability and income to temper equity risk in the portfolio.
According to Bartolini, non-US stocks have lagged over the past few years, but shifts are cyclical and targeting foreign fiscal policy beneficiaries may enhance and diversify returns.
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