S&P 500 tries to break out of its trading range – Meanwhile most fund managers stay on the sideline

In the last 6 weeks the US markets have traded in a sideways channel after the strong recovery rally. Since our last publication we have reached the upper end of the trading range. We do feel remembered how it was in 2009 and 2010. Cash levels from fund managers are according to the latest BofAML report still at record level. I.e. the rally was missed out by a lot of professionals.

Fig. 1: S&P 500 has not broken out of its resistance zone (2’850-2’950)

Expression like FOMO (fear of missing out), TINA (there is no alternative) and the sentence “this is the most hated rally in history” are all back on the news ticker.

However, equity markets, measured by the Shiller PE, are expensive compared to 2009, especially in the US and the Swiss market.

Fig. 2: Still very high cash level: fund managers are not participating in the rally

Fig. 3: Global Shiller PE’s and PB ratios: Denmark, USA and Switzerland are expensive

A high Shiller PE (aka CAPE) states that over the next 10 years the average anual return will be much lower than the historical average. The actaul level of the US indicates a single digit nominal return below 4% annualisied over the next decade.

Fig 4: Fear of the 2^nd wave still dominates the minds of fund managers

Now obviously the fear of the 2nd wave is the key unknown risk for H2 2020 and 2021. The market is pricing in a recovery. It is open if it is U-, V- or W-shaped. But if we see a recovery after the lockdown and only a minor 2^nd wave then maybe the equity markets are right. The latest figures from hotspots like Italy, Spain and to lesser degree from the US let us at least assume that the first wave is coming to an end. China and South Korea so far demonstrate that they have the spreading of the virus under control.

The big concern is if the western world can replicate that. There are at least considerable doubts about it. The full back tracking of each new case is a key. However, the resistance of the population to help with installing a tracking software on each mobile is rising. The discipline once bars are open to keep social distancing is as well doubtful.

Fig 5: Net 4% of fund managers believe gold is cheap and expect the USD to weaken due to new QE

Having said that we still would argue that cash is not a good place to park your investable money. We continue to advocate that some allocation to gold could make sense.

Fig. 6: Gold is climbing the wall of worry

Recently Fed chair Powell made the statement “do not bet against the US economy”. This was done after admitting that there will be at least a minus 30% QoQ drop in US GDP in the actual quarter. The statement must be seen in the context of the actual debate about an additional fiscal stimulus package of more than USD 2 trillion.

Therefore, we would not significantly underweight US equities although they are as shown very expensive measured by price to book and the Shiller PE.

Published: 20/05/20 by Blackfort CIO Dr. Andreas Bickel

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