We see the SPX losing 22% over the next 2-3 months. The call is primarily based on technical factors; however, given the market’s current valuation, the fundamentals also support this view. We contend that the texture of today’s price action is very similar to the early 2000’s, as illustrated below.
NYSE composite 1998-2003 versus NYSE comp 2012-present (80% time compression)
The ExodusPoint Partners International Fund returned 0.36% for May, bringing its year-to-date return to 3.31% in a year that's been particularly challenging for most hedge funds, pushing many into the red. Macroeconomic factors continued to weigh on the market, resulting in significant intra-month volatility for May, although risk assets generally ended the month flat. Macro Read More
And on a shorter time frame.
We overlaid the charts after finding many fundamental similarities between the early 2000’s and today:
- Median P/E nearing tech bubble levels
2. EV/EBTIDA consistent with the early 2002 (alphahat.com)
3. Leverage at similar levels – debt/assets as high as early 2000’s, as well as debt/equity
4. Number of IPOs with no earnings above 2008 and consistent with 2000
5. Dollar price action similar across both time periods – smaller yellow box in-line with analog
6. And the percentage nominal GDP growth from non-discretionary items at comparable levels, flashing late cycle signs
With this as our backdrop, we overlaid our current fundamental view of the US economy and our forecast for the next 6-9 months. We see the US entering a recession in the first quarter of 2017, as consumer spending declines materially, outlined in detail here.
In addition, we see a few elements adding to the thesis:
- 90% of companies are in a buyback blackout period that will last until November 4th. We heard from Dalio last year that, “the biggest force in the stock market right now is the buybacks and mergers and acquisitions. So something like 70 percent of the buy, the buying in the stock market, is along those lines.” This would mean ~63% of the bid is on vacation for the next few weeks, which subjects the market to a sharp downward move should participants liquidate in size.
- There has been a large divergence between the US equity market and CNYUSD, which we see being closed over the next few months as fears of a slowdown in China creep back into the market. We would note that the long bond has been paying attention, with a slight divergence recently.
- We see the probabilities in favor of leadership rolling, as shown below by the price overlay of AAPL (blue 2006-2012) and AMZN (Red 2011-present)
- Citi has also done some work on the similarities between 1987 and today, as shown below. While we do not see this as the highest probabilistic outcome, we do see it as a data point in our overall thesis.
Given the scenario outlined above, we see the probabilities heavily favoring a downside move. We should know over the next two weeks if we’re wrong or not.
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