Risk Adjusted Returns In The 99th Percentile


S&P 500 Rebounds

The stock market recovered after a morning selloff related to the coronavirus. From the low on the day, to the close, the S&P 500 rose 0.63%. WHO stated, it’s a “bit too early to consider this event as a public health emergency of international concern.” 

So far, there have been 600 confirmed cases. It’s obviously concerning from a public health standpoint. But it’s not something to worry about in terms of investing.

Euphoria Continues

S&P 500 hasn’t had 2 down days in a row in 29 days which is the 2nd longest streak since 2005. There was a 30 day streak 2 months ago, which will soon be surpassed. It has been over 70 days since the market moved by 1% or more in either direction. This has been a fantastic run. Even though the S&P 500 is near its record high and is already up 2.93% year to date, the CNN fear and greed index has calmed down. It fell 6 points to 68 which is greed. We haven’t even had a correction and it is approaching neutral. 

As you can see from the chart above, the S&P 500’s 3 month risk adjusted returns are in the 99th percentile since 1927. It’s near where it was in February 2018 when the short VIX trade unwound. Similarly, the average Sharpe ratio of the S&P 500, treasuries, investment grade debt, high yield debt, gold, and the typical 60/40 portfolio (which is 60% stock and 40% bonds) is 0.89 which is the highest average since 1991. 

It has never been so easy to make money. It’s easy to invest in something that has low volatility and high excess returns over the risk free rate. This has been a great bull market in bonds and stocks.  

Now let’s look at sentiment which has recently been trending towards optimism. As you can see from the chart below, the percentage of bulls is up to 45.6%. It increased 3.8% this week, putting it 7.6% above average. Percentage of bears fell 2.7 points to 24.8% which is 5.7% below average. Current NDR sentiment index is at 71.4. It peaked at 78.9 in January 2018.

aaiibullishhigher CHART

Details Of Thursday’s Action In Markets

Nasdaq increased 0.2% and the Russell 2000 was up 3 basis points. VIX rose 7 basis points to 12.98 as there was some volatility in the morning. Yet again, the utilities were up as they increased 0.92%. Best 2 sectors were the industrials and real estate which rose 1.13% and 0.97%. Industrials were helped by the WHO statement which calmed concerned of a health crisis. Boeing stock rose 2.84%.

Worst 2 sectors were healthcare and energy. A good Bernie poll may have hurt healthcare. Tech has been on a great run. It was up 0.48% on Thursday. As you can see from the chart below, global investors in the Bank of America fund manager survey stated they were the most overweight tech. 

Interestingly, they were underweight utilities which has been a big winner with the decline in yields. 10 year bond has been on an amazing run as it is down to 1.73% on the back of falling inflation expectations due in part to the decline in oil prices. 2 year yield is down to 1.51% which has pushed the odds of a rate cut this year up to 64.8%.

The chart below shows how well the 3 biggest tech firms have done compared to the Russell 2000 in recent years. Small caps have underperformed and the big tech names have driven big cap indexes higher. These 3 firms alone are over 60% larger than all 2,000 firms in the small cap index combined.

Intel Reports Great Q4 Earnings

It has taken almost 20 years, but Intel is nearing its record high it set in 2000 during the tech bubble. That’s nothing to sneer at as many of the bubble firms went out of business. The stock got even closer with its 5.57% rally after hours on Thursday on its great Q4 earnings report. 

It reported EPS of $1.52 which beat the consensus of $1.25. It also beat on the top line, reporting $20.21 billion in revenues which beat estimates for $19.23 billion. Revenues were up 8% from last year.

The chart below breaks down revenue growth by group. Client Computing had revenues of $10.01 billion which was up 2%. Data Center revenues were up 19% to $7.21 billion. The firm reported great guidance as it expects $1.3 in EPS and $19 billion in revenues in Q1 which is better than estimates for $1.04 and $17.19 billion. 

Intel’s CEO stated, “We think that Intel’s PC chip shortages likely resulted in some PC business being pushed from the December quarter into the March-2020 quarter, which we think could cause Intel’s CCG revenue in the March quarter to be higher than usual, despite a sequential seasonal step down.”

With 75 firms having reported earnings, 69% have beaten EPS estimates on 4.23% growth and 66% have beaten sales estimates on 2.99% growth.

Bernie Has Momentum

Bernie has the most momentum at the best time for a candidate to be doing well as the elections start in less than 2 weeks. Fresh off leading a CNN national poll by 3 points, on Thursday there was a New Hampshire poll that showed Sanders ahead by 12 points over Buttigieg. He now has a 4 point lead in the average of recent polls. That 12 point lead matches his highest lead. The prior high was last April.

The latest Emerson national poll on Friday shows Biden in first place over Sanders by just 3 points. Biden’s average lead is just 6.2 points. Compared to the prior Emerson poll in mid-December, Biden lost 2 points, Sanders gained 2 points, and Warren gained 1 point. Momentum is on Bernie’s side as PredictIt has his odds of winning the nomination up to 33% which is 5% higher than 2 days prior. Biden is at 38% which is 3 points lower than 2 days ago. 

The post Risk Adjusted Returns In The 99th Percentile appeared first on Theo Trade.

Source: First Rebuttal

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