Weekly S&P500 #ChartStorm – 18 Mar 2018

So here’s the another S&P 500 #ChartStorm write-up!

1. S&P500 Seasonality: First up is a look at how the S&P500 is tracking against its historical average seasonal pattern. On this one I would look more at where the seasonal tendency lies in the coming months than where the market has been tracking as such, and the key takeaway there is that from a seasonal standpoint there is some upside bias in the next couple of months, followed by the “sell in May” doldrums. For a few reasons I think this ties in well with some of the other dynamics such as valuation, monetary policy, and earnings cycles. So watch out for that seasonal soft patch further out.
Bottom line: The market is in the middle of a positive seasonal patch.

2. Monthly Seasonality Statistics: Next stop is the same topic, but by month (previous was by business day), and a little more detail on the statistical side. Again it shows how March/April – but particularly April have historically been strong performing months – and the red/orange months ahead give caution for what’s to come. But also worth noting aside from the average return is the proportion of time returns were positive: April is first equal on this stat. But even then, if you notice the worst drawdown for April, it was still -9%, which goes to show you can’t rely on seasonality as a signal, but rather you bring it in as another factor to round out a broader thesis.
Bottom line: The monthly seasonal stats show April is historically the best performing month.

3. Foreign Flows: This very interesting graph from hedgopia shows the rolling annual net-flows from foreigners into US equities. Indeed, the 12-months to January saw a substantial $140B of net inflows from offshore. So I guess you could say that foreigners are all-in on US stocks. I would note though that the flows do not appear to be standardized i.e. not deflated by market cap/index/cpi, so in that respect you could argue that $140B today is much smaller than around $190B at the dot com peak and $200B at the 2007 peak (i.e. if you inflation adjusted the $190B in 2000, it would be about $275B in today’s dollars). So in that sense, this could be more of a momentum signal rather than a contrarian signal as such – in that it would need to reach a true/new extreme to be considered a contrarian signal. Nonetheless the chart is still very interesting. – particularly the turnaround vs 2016.
Bottom line: Foreigners have been heavy net-buyers of US stocks.

4. QE Stocks: Along with the big secular bull market since 2009, there has been basically a secular bull market in the sum of global central bank balance sheets. Easy monetary policy was obviously helpful for the economic recovery and of course it’s a well established understanding that easy monetary policy is typically supportive for stocks, but it’s worth noting that stocks can and do go up without central bank balance sheets rising, so in that sense I would be skeptical of comments that it’s a fake market or manipulated etc. But anyway, it certainly puts things in perspective.
Bottom line: The strong run in the S&P500 has been matched by an equally strong run in central bank assets.

5. Asset Prices and Flows: On a similar line, this power-chart shows the path of the benchmark index for both bonds and stocks and for good measure also shows the cumulative flows across 4 key aspects in the bottom panel. Out in front on the flows is corporate buybacks at $4 trillion, which even exceeds the total expansion of the Fed’s balance sheet, and far outweighs retail equity fund flows and bond fund flows. No signs of any ‘great rotation’ here.
Bottom line: Corporate buybacks have exceeded retail equity fund flows almost 7 to 1.

6. Median Net-Debt to EBITDA Ratio: On a similar theme, this chart shows the median net-debt to EBITDA ratio across non-financial companies in the S&P500. Clearly it is at a record high, but there are a couple of important points that I would highlight for this one. First point is interest rates are still extraordinarily low vs history, despite the recent move up, this means that a given amount of debt is going to easier to service today than back when interest rates were in double digits. Second, I presume that they are using mark-to-market valuations of debt, and if so then the lower bond yields would have lifted the value of debt. But anyway, it is still a remarkable chart, and notwithstanding those comments, leverage has risen – which is rational in a low rate environment…
Bottom line: The median S&P500 non-financial company net-debt to EBITDA ratio is at a record high.

7. Household Equity Weightings: Another interesting long-term chart, this one shows households’ holding of equities as a proportion of total financial assets. Important to note that it said total financial assets and not total assets – so it’s not really a pure asset allocation view as such, just the split between equity and non-equity financial assets. A more complete view would be to show equities as a proportion of total assets. That said, the chart does look remarkable, particularly given the latest reading is approaching the heights last seen in the later stages of the dot-com bubble. Caveats aside, it’s clear that this is a late-cycle phenomenon.
Bottom line: Household equity allocations as a proportion of financial assets is the highest since the late 1990’s.

8. Forward Earnings: This chart from FactSet shows the course of the index and Q118 bottom up EPS estimates. You can see the instant bump up in estimates following the wake of the corporate tax reforms. Although there does seem to be a slight tapering off in estimates in the proceeding period. Goes to show the market seemed to get a one-off shot from the surge in earnings, and indeed the key from here will be whether earnings can at least maintain, if not continue to grow as potential multiplier effects kick in and existing trends support earnings growth e.g. solid global and domestic economic growth, a weaker USD, stronger commodity prices.
Bottom line: Earnings estimates got a one-off bump from the corporate tax cuts.

9. US IPO Market: “No profits, No problem!” – the proportion of US IPOs with negative earnings reached 76%, which is the same as in 1999. The top culprit was Biotech companies, with 97% of biotech IPOs in the loss making camp. Second place, no prizes for guessing, was Technology companies at 83%. But interestingly enough that left ‘all other companies’ at 57% – which is was a record high. It’s again another type of signal or condition that would likely show up at the later end of the cycle. I would note however that the total number of IPOs is smaller now than the scorching pace seen in the late 1990’s.
Bottom line: The proportion of IPOs with negative earnings reached the highest point since the dot-com boom.

10. S&P500 Price in Bitcoin: Final chart is a bit of a fun one, it shows the S&P500 “priced in Bitcoin” i.e. the S&P500 divided by the price of Bitcoin in US dollars. I had to show it in log-scale because of the extreme movement in the early stages (and series of extreme movements thereafter). With the December peak in Bitcoin, the S&P500 has been clawing back some relative performance in recent months. Small consolation against the massive and sustained underperformance of the past 6-7 years. From here it’s anyone’s guess as to whether the S&P500 will continue to clawback relative performance. Much of that will lie in the outlook for Bitcoin prices.
Bottom line: The S&P500 has clawed back some relative performance against Bitcoin lately.

So where does all this leave us?

This week there’s quite a mix of charts, but 3 themes seem to standout…
1. Seasonality
The first two charts outlined how we are currently in a seasonally strong patch – but the seasons will be changing from around May onwards.
2. Flows
On flows we saw substantial flows from foreigners (albeit arguable small vs previous peaks), big flows from buybacks, and a large run-up in global central bank balance sheets.
3. Late cycle
A couple of late-cycle type signals showed up, such as the growing proportion of equities as a share of household’s financial assets, a growing proportion of IPOs with negative earnings, and a substantial rise in corporate leverage.

Stepping back, there are a seemingly growing list of signs and signals which typically appear later in the cycle, whether it’s companies IPO’ing with no profits, rising household equity allocations, rising corporate leverage, or a slew of other signs. But I’ve said it before – late-cycle is not the same as end-cycle, and if you want a case study in speculative overshoots you need only look back at the late 1990’s. So it’s a case of focus on risk management and keep an eye on the charts at this point.