Signs of froth are becoming evident in US markets for the first time since before January's correction. That's according to Citigroup and Goldman Sachs, which both uttered cautionary words last week as indices hovered around all-time highs.
High valuations and a tightening job market mean Goldman’s bull/bear market indicator is now “flashing red”, the bank said last week. High readings suggest an elevated risk of a bear market (the last two bear markets have coincided with peak readings) or low returns over the next five years, said Goldman, which reckons the latter is more likely than an impending bear.
Meanwhile, the ordinarily bullish Tobias Lefkovich of Citigroup is concerned that sentiment is now excessively bullish for the first time since January’s market peak. Citi’s Panic/Euphoria model, a composite of nine different sentiment metrics ranging from options trading to sentiment among investment newsletter writers, suggests sentiment is now in euphoric territory. That should concern investors, says Lefkovich; history indicates there’s a 70 per cent the S&P 500 will be lower in 12 months’ time, he says, more than three times greater than normal.
US recession is ‘years away’
Bulls might retort that while sentiment and valuations may suggest some market excess, a whole variety of other indicators (many of which Stocktake has noted in recent months) suggest the path of least resistance for stock prices is upward.
Last week’s ISM Manufacturing Index reading will certainly encourage bulls. Readings above 50 indicate an expansion in activity, so the latest reading of 61.3 – the highest in 14 years – is an unambiguously strong one. Of course, bears might say that strengthens the case for faster rate hikes, which could potentially hurt stock prices, but strong ISM index readings have traditionally been correlated with further stock market gains.
Typically, a strong economy doesn’t suddenly collapse: since 1950, manufacturing activity has peaked a median 31.5 months before the start of the next recession, Canaccord Genuity noted last week, with the S&P 500 tending to gain about 35 per cent over the two years subsequent to peak readings. This time may be different, of course, but investors should be cheered that “yet another” important economic indicator “suggests a recession likely remains years away”.
Deutsche Bank bids farewell to Euro Stoxx 50
“Another one that would have been once thought unlikely, if not unthinkable.” That was how influential Allianz economist Mohamed El-Erian reacted to last week’s news that Germany’s largest bank, Deutsche Bank, is to be demoted from the blue-chip Euro Stoxx 50 index.
An ever-present since the index’s inception in 1998, it’s just the latest indignity for this once-mighty institution. Deutsche’s value has been shredded since the global financial crisis, losing 90 per cent of its value since 2007. Bottom-fishers who thought shares couldn’t go much lower keep getting punished, with the stock down 38 per cent in 2018 alone.
And far from turning the corner, structural changes mean further pain is coming, Berenberg's Eoin Mullany warned recently. Like Deutsche, other European banks like Credit Suisse, UBS and Royal Bank of Scotland were hit by having to scale back their investment banking ambitions, said Mullany, but they were able to fall back on strong core businesses in retail banking or wealth management. Things are different for Deutsche, which is "slowly fading away". Falling out of the Euro Stoxx 50 could lead to further weakness in the near term, due to index trackers being forced to sell their shares. Some analysts warn there may also be long-term reputational repercussions for a company which has long prided itself for being one of Europe's biggest banks.
Still, forced selling can create opportunities, and contrarians will note that companies deleted from an index typically strongly outperform index additions over the following year – one source of solace for beleaguered Deutsche shareholders.
Amazon’s $1 trillion sprint
Amazon
last week became the second US company to be valued at more than $1 trillion. Although
Apple
may have pipped Amazon in the race to become the first trillionaire, the speed of Amazon’s ascent leaves the iPhone maker in the shade. It took Amazon just 165 trading sessions to grow its market value from $600 billion in January to $1 trillion, the
Wall Street Journal
noted last week – less than the 183 trading sessions it took for Apple to grow from $900 billion to $1 trillion.
Amazon is up almost 75 per cent this year, an astonishing growth rate more in keeping with a high-flying start-up than a mega-cap company. The chief beneficiary is Amazon boss Jeff Bezos, whose net worth ($167 billion) has increased by $67 billion in 2018 alone, or about $8 million an hour.
According to Bloomberg, the wealth of the 499 other billionaires on its Bloomberg Billionaires Index has increased by “just” $8.3 billion over the same period. As Bloomberg puts it, Apple walked to $1 trillion, but Amazon got there in a sprint.
