Is The Current Level Justified?
The Fed Economic Policy Uncertainty Index (a quantification of policy discussion in major publications) has returned to levels last seen before the market collapse of 2020. Indeed, it is hovering at the lower end of levels last seen since 2015.
What Are The Consequences And Will It Continue?
For much of 2021 economic reports from the Eurozone have more consistently beaten estimates compared with their American counterparts. These “surprising” results have contributed to the recent strength of the euro and European stock markets.
Retail Investors Haven’t Had Such Influence On Markets Since The 1960s
Retail investors have returned to a level of influence on market behaviour last seen in the 1960s. This greater retail participation is demonstrated by the trends in call option buying, where retail traders have assumed a dominant position since the March 2020 market collapse.
Real Interest Rates Say Much About The Current Risk Level
In yet another demonstration of hope over economic reality, we present a chart illustrating that both B and BB rated bonds (aka junk) are currently trading below the rate of inflation.
Therefore, equities, Treasury and junk bonds are all now trading with negative real returns.
Short Interest level Has Important Implications Going Forward
At the risk of growing tiresome, we present another chart that supports our view that markets currently offer a poor risk/reward proposition to investors.
S&P 500 short interest has declined to all-time lows and now rests at levels last seen at the peak of the internet bubble era.
This Calculation Contains Important Information About Market Risk and Expected Returns.
Is there a single greatest predictor of stock market returns? No, markets are much too complicated for one calculation to be reliably relied on. However, the chart below can be a very useful tool for investors as it incorporates important investing precepts.
Over the past 15 years, the most powerful trend in investing has been the growth of passive investing, which is the long-term purchase of investment vehicles whose performance is linked to a relatively fixed set of investment instruments, such as a stock index. The appeal of passive investment has not been limited to individual investors but has been embraced by pension funds and other institutional investors. Unfortunately, it is this extreme popularity that may produce the conditions that could expose devotees of passive investing to the risk of significant losses in the years ahead.
The popularity of passive investment is…
The unwinding of Speculative Positions In Cyclicals May Have Major Consequences For Capital Markets
Trader positioning to profit from an economic upswing has recently declined sharply, after reaching levels last seen following the 2008 Financial Crisis.
At that time there were concerns that the stimulus packages would ignite inflationary pressures and create a prolonged boom in commodity prices. Both upticks in inflation and commodity prices proved to be temporary.
Capital Flows In/Out of Tech Funds Have Been A Leading Market Indicator
TECH FUND OUTFLOWS ACCELERATING
Capital flows into tech funds coincided with the peak in investor euphoria earlier this year.
Since that time, they declined sharply and are trending negative at the highest rate since late 2018.
Outflows from tech funds acted as an early indication of broad market weakness in the fourth quarter of 2018.
This Measurement Is Often Seen Near Market Tops
Mutual fund (and pension) cash levels are currently at all-time lows, suggesting that equity markets are running out of fuel to move higher. Cash and liquid asset levels are currently below the low levels seen in early 2020, prior to the market collapse. These levels are particularly noteworthy given the gigantic fiscal and monetary stimulus programs of the past year!