Selloff: More to come but we recommend buying the dip

We have seen a 2nd leg of this pullback. Although nobody can know how far this will go further down, most analysts look at the same charts. Based on the S&P 500 the distance to the 90-day average is around 4% and to the 200-day average is around 14%. We see today in the futures prices a further loss of around 0.5%, which indicates that the selloff is not over. The good news however is that yesterday there was a substantial volume behind the selloff. This season of the year and especially during an US election year is normally weak. This pullback was overdue, and one tries hard to find reasons for it. But maybe it is just a simple mean reversion process.

Fig. 1: S&P 500 futures trade below their 50-day average

The equity selloff on Monday had an impact on corporate spreads, which widened around 25 basis point. Meanwhile government bonds rallied, 10-year treasury yield stands around 0.66% and the 30year bond trades at 1.19%. Therefore, the whole spectrum of the yield curve is after inflation (i.e. real yield) giving investors negative returns. Bloomberg TV has picked up this fact and talks now of financial repression like we did several times before.

However, we believe that this is an important part to solve over time the debt to GDP problem. We need to stress that only with additional fiscal stimulus we can expect that inflation and growth will be created over the coming months and years.

Regarding the fiscal stimulus it is important that the money is really spent and not used to reduce balance sheet problems. I.e. the state needs to invest and if money is given to private individuals it must be coupled with a mandatory feature to spend or invest it.

Fig. 2: Spread widening after the selloff in US equities

Fig. 3: FAANGM looks like a bubble: history does not repeat but it rhymes

It is important to add that the market was only in a small segment showing bubble prices. The FAANGM stocks price has risen 20 times since 2010. The key question for the next months is, will we see a sector rotation and a catch up of all the other stocks, which did not participate at the current rally.

We believe that this might happen due to the underestimated resilience of the global economy and the massive stimulus from the fiscal and monetary side.

Yesterday the NYFANG+ index has outperformed the rest of the broad market. From a technical point the index still trades above its 50-day average.

Fig. 4: NYFANG+ index has outperformed in the 2nd leg of this pullback

The Nasdaq 100 index closed almost at 0% due to the FANG+ stocks. Meanwhile once more European stocks sold off the most and look now vulnerable. For instance, the largest 50 Eurozone stocks trade below their 200-day average. Asian stocks sold the least on a global level, we therefore like to state again that besides US equites we prefer Asian stocks. In particular China A-Shares. We dislike European equities as we expect the Eurozone to recover slowly and a stronger Euro against the USD which puts another drag on growth. Also, the sector composition speaks against Europe and for Asian and US stocks. The disruptive effect of digitalization will continue for years, but most companies which profit from this trend are not European. Having said that, we still expect upside for European stocks due to valuation, the fiscal and monetary stimulus but we most likely will see a continuation of outperformance of other regions.

For risk takers we like to stress that Brazilian stocks are extremely cheap. They lost around 16% in local currency but more that 26% in USD. This weak currency is a strong stimulus and the PMI indicates a strong recovery disregarding the weak government.

Fig 5: Euro Stoxx 50 still in its trading range but now below its 200-day average

Fig 6: Brazilian Equity Index trades at its 200-day average: A turning point?

Fig. 7: China and India will be larger than all other economies of the world

Fig 8: Gold has broken out of its triangle

Gold is consolidating and is very volatile, but we believe at around USD 1’840 we have a strong support which most likely will not be broken. Therefore, buy the dip is a reasonable strategy.

To sum it up: the US government bond yield went down, we keep thinking that the US treasury yield curve is stuck at current levels and distorted by the Fed buying program. We prefer US corporates although they are as well trading at high levels. Due to the Fed corporate bond buying program their downside is limited.

Citi group was the last bearish strategist which has given up and has risen its S&P 500 target. Sadly for them, once they did that US markets sold off. However, we believe that over the coming weeks markets will recover and depending on a clear outcome of the US election close even higher than before this actual pullback.

Published: 22/09/20 by Blackfort CIO Dr. Andreas Bickel


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