Tags: markets | investors | 2020 | bonds | equities

Investors Should Shy Away From Stocks, Embrace Bonds

Investors Should Shy Away From Stocks, Embrace Bonds
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By    |   Sunday, 22 December 2019 09:24 PM

While the final trading day for 2019, which is December 31 (bond markets close that day early at 2 p.m. ET) is coming closer, we can say that 2019 was overall a very good year for the equity markets of risky assets.

For example, the S&P 500 is bound to perform a return of around 25 percent, of course under the condition that no “shock” occurs between now and December 31.

This performance has been helped in a significant way, among other things, by:

  • 3 Federal Reserve rate cuts, but also by rate cuts by other central banks.
  • Central bank liquidity support, which at this moment in the U.S. is managed by the NY Federal Reserve of a massive liquidity extension operation that will stretch well into 2020 of about $500 billion of Treasury Bill Purchases and overnight and term Repurchase Operations (REPOS).
  • A gradual rise of global manufacturing PMI data that started during the summer and as shown in the China PMI and U.S. manufacturing sentiment surveys. By the way, the next U.S. Manufacturing ISM report on business will be released on January 3 and could be very important as it provides markets more indications on where manufacturing could be headed for. Investors could do well keeping in mind that historically, risky assets keep delivering positively after a significant bottom in the global manufacturing PMI.

So, if the “trough” in the global manufacturing PMI during the summer should be confirmed, that “could be” (I’m not saying “will be”) significant as far as a continuation of the still ongoing Bull Run of risky assets is concerned into next year.

It might also be good to recall the fact that in the second half of September of this year, macro hedge funds were seriously “underweight” risky equities and they had to change their positions (re-position) away from being “short” risky assets, which is often referred to as the so-called “pain trade” and that often translates into higher equity prices.

However, as for now at least, macro hedge funds have become the most bullish once again since July when then risk appetite was clearly faltering. That situation was in fact in some way similar to the bullishness we have seen in Q4 of 2018 and that preceded the crash during the fourth quarter of that year when the S&P 500 and Dow plunged respectively 13.97 and 11.8 percent, their worst performances since 2011, CNBC reported.

I personally, and for now at least, remain worried about the downside risks that in my view hang over the equity markets. In short, I’d prefer remaining underweight equities vs. bonds and cash equivalent instruments.

For investors, the understandable question is: “Could the markets of risky assets continue on their way up in 2020?”

A straight answer to that question doesn’t exist, but taking a look at some statistics could be of some help.

When we go back to 1935 and look for the years when the equity markets have delivered strong performances, as probably will be the case for 2019, in the year that followed, equity markets have risen on average by about 7 percent in 12 of 17 cases.

When we zoom in somewhat and look at what happened when the S&P 500 also has delivered strong performances in the period when Alan Greenspan and Ben Bernanke were at the helm of the Federal Reserve, the following year, the returns on the S&P 500 have risen on average by about 12 percent 6 times and have declined only once.

Of course all that was for a great part thanks to the so-called “Alan Greenspan-Ben Bernanke put” whereby the Fed tried to support the U.S. economy by actively using the Federal funds rate as a lever for change, which many believe encouraged excessive risk taking that led to profitability in put options.

It’s certainly not an overstatement to say that “normally” equity markets should rise in 2020, albeit to a lesser extent than this year.

Now, as of late, very few things have evolved in a “normal way” like for example, equity markets of risky assets never reacted really negatively to all the negative news that it had to digest this year.

So, the multi-million dollar question remains if the equity markets of risky assets aren’t already pricing in all the positive news that may or that may not happen…

Etienne "Hans" Parisis is a bank economist who has advised investors on financial markets and international investments.

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For investors, the understandable question is: “Could the markets of risky assets continue on their way up in 2020?”
markets, investors, 2020, bonds, equities
Sunday, 22 December 2019 09:24 PM
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