All posts in category: Correction (11)

A Classic of its Kind

Friday, August 2nd, 2024

De-risk your equity portfolio

Our multi-asset models have significantly reduced their exposure to global equities. The US dollar version is already neutral; we expect the euro version to get there in the near future. We have long argued that there would be period of seasonal weakness in equities in Q3 and this has arrived bang on schedule. The narrative behind it is of secondary importance, but current fears about a US slowdown should be enough to persuade investors not to rotate into Small Caps. The trade which works is to de-risk equity portfolios by reducing exposure to cyclical sectors and increasing it in defensives like Utilities, Healthcare, Telecom and even Consumer Staples. We have been recommending this since early June. It’s something all investors can do, even if they are nervous about moving into fixed income, when US 10-year Treasuries yield less than 4%.

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Respect the Seasons

Tuesday, April 2nd, 2024

Bonds expected to correct before equities

US Equities have been overbought for the last nine weeks, but there have been three longer streaks than this since 2000. Late March is one of two seasonal peaks for expected returns on the S&P 500. Q2 normally produces sub-par but positive returns and the greatest risk of negative returns only comes in Q3. Seasonality also suggests that Treasuries can be weak in Q2, which would fit very nicely with a narrative of only two rate cuts from the Fed in 2024. So even if equities are due some profit-taking, we are reluctant to switch into Treasuries, until they have corrected. We do expect some change in sector leadership, but not a wholesale switch into the laggards. Relative strength and sector persistence data both suggest that leadership will rotate around the top five groups: Financials, Industrials, Technology, Communications and Consumer Discretionary.

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Stall Speed

Monday, October 23rd, 2023

US equities may be on the verge of a short-term correction

One of our key indicators for US equities is flashing amber. The recommended weighting when compared with a portfolio of 10-year Treasuries and cash has fallen to a level where it historically continues down to zero more often than not. This could be accomplished by a correction in equities or a rally in bonds – very probably a mixture of both. However, we are more optimistic about the medium-term future. We don’t think this correction would indicate an upcoming US recession. It’s very difficult to have one, when the Federal budget deficit is over 6%. In our view, the correction in equities is a necessary pre-condition for putting a short-term floor under the Treasury market.

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The Next Ten Percent

Friday, September 15th, 2023

What happens if US equities have a correction

We think that US equities may be vulnerable to a correction over the next two to three months. Our models suggest that the Technology sector may be about to underperform and that this could put pressure on other related sectors which have also performed strongly this year. We identify three separate trades which may be able to mitigate some of the impact: long-dated US Treasuries, large cap Japanese equities and Energy equities in the US and Europe. The rationale behind each idea is discussed in detail in the note, but the key point is that they are largely unrelated and therefore offer an interesting diversification strategy as well.

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How Low Do We Go?

Wednesday, October 24th, 2018

This is a correction, not a bear market

Our asset allocation model cannot get much more bearish. In our view the reason for the recent weakness has been the need for US equities to adjust to PE ratios in line with their long run average now that everything else – real interest rates, risk conditions and earnings growth – is also approaching its own average. We are less concerned about the prospect of a US recession, partly because we see no warning signs from the credit markets. Our model is unlikely to get more optimistic in the next six weeks, but this may happen just in time for Christmas.

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Winter Is Coming

Wednesday, August 23rd, 2017

But it will be very mild to start with

We fully expect a correction in US and global equities at some stage during the Autumn, but unless two or more of our risk-scenarios crystallize at the same time, we don’t think it will be more than 10%. There is too much residual momentum, especially outside the USA, and even after a correction, realised volatility will be below its long-run average.

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Lucky Dip

Wednesday, July 5th, 2017

Buy the Eurozone correction, not the US

We agree with consensus that an equity correction could happen at any time. However, we will not be buying the dip in the US. We much prefer the Eurozone, which has a habit of late-cycle outperformance. We also prefer Japan, which has just hit a new 22-year high, to EM, which keeps failing at resistance just above current levels.

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A Warning from History

Wednesday, June 7th, 2017

High exposure to Euro Equities can be dangerous

There is a lot of concern that the ultra-low level of volatility may herald the death of the global equity bull market. But historically this has been a poor indicator (as have Tech bubbles). Two which have worked in the past are very low exposure to US investment grade credit and very high exposure to Eurozone Equities, both of which we have now. But the lead-time from here could be between 10-30 weeks.

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Where To Next?

Wednesday, March 29th, 2017

US investors need to diversify geographically

US Equities look as though they are due a 5-10% correction, so US investors have a chance to look at other opportunities. One option is a Northern Europe group of fiscally responsible countries in and out of the Eurozone. Our preferred option is a diverse group of EMs, including India, Korea, Mexico, South Africa and Turkey, which offer equivalent risk-adjusted returns, but much lower correlation with US Equities.

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Messy and Inconsistent

Wednesday, March 22nd, 2017

High equity exposure vs rotation into defensives

The rotation into US defensives has broadened over the last two weeks. There is a potential contradiction with the high exposure to equities recommended by our asset allocation model. We look at the maths underlying our asset allocation decision, historical precedents for US equities being overbought and international equity comparisons. A 5-10% correction followed by renewed strength, just about fits all the evidence.

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