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Don't Fight the Fed

Updated: Oct 31, 2023

Please lets not get too caught up in Market misery, yes the S&P500 had its fastest 36% fall but it has also been followed by its fastest 21% rally ever; why that data I sent you on the SPX annualised returns [Not icl. dividends] since the 1950’s is so powerful.  As I write the S&P500 is YTD -11.63% but as a £ investor you have made 6%+ on your $$$ so its much better. than that please do remember that when you get your latest statement. Nutstuff Long Portfolio is +8.9% currency adjusted vs the SPX currency adjusted -8.9%. 

I DO worry about levels of crowding and Concentration in Medga-Caps here [see more below] but honestly a mkt hugely off its lows hasnt been and still is not illogical to Nutstuff;  think stimulus logically, if each person over age 16 gets $2k per month, and $500 per month for children, a family of 5 with one 16-year old child will get $7,500 per month. With no rent or payroll taxes to pay, they will be far better off than before the virus. What politician will ever vote to take that away? What Am I missing? 

Put another way, U.S. GDP looks to be down 15%ish, unannualized, from its peak. So, SPX is presently down a similar amount from its peak. Ergo stocks now are back to the Feb 19th highs from a valuation perspective. “In Fed We Trust” is all the buyers have. GDP isn't static. It'll come back over next 12 months, so $SPY will too. Valuations will go up because money has to be put to work by managers.

Where else to invest? Cash? Loser. Gold? Ponzi. TINA to equities. Very hard to short equities into 0% interest rates with unprecedented monetary and fiscal stimulus, which together equal nearly 50% of GDP. As my friend AJ reminded me, that’s like filling a bath tub with a fire hose, and while the overflow could ultimately drown you with inflation, just worry about that later.

For now, we need water and we’re getting it. Many high quality growth stocks are still down 30-40% from all-time highs, and they too will likely float higher. Don’t fight the Fed.

At the same time whats fascinates is bets against the SPDR S&P 500 "rose to $68.1 billion last week, the highest level in data going back to January 2016" Word of caution to sacredish and bearish : Dont forget Jan. early-Feb 2016 & then the ensuing 2yrs. 

So whos Buying here? well its definitely NOT hedge funds, which according to Goldman, saw the largest monthly dollar net selling since Aug '16 in the month though April 15, with all 11 US sectors sold MTD, led by Cyclical sectors. In other words, hedge funds are not driving this rally, but instead are (panic) selling in droves into it. 

One possible explanation for the move higher - especially in the Russell/small caps - is that,  "the big talking-point in equities-circles of the past week has been the extreme mega-cap outperformance over small-cap; thus, our U.S. Equities “Size” factor market-neutral strategy has experienced the largest 4d cumulative drawdown experienced over the past decade at -11.3%, which is a a -6.3 sigma event (10Y rel)”. 

Ok Nutstuff understands the rotation, I talked about it mid last week, and Bannister has talked Growth to Value, but if you dont want levereage and you want genuine viable businesses trading at discount to replacemnt value of their assets its tough to find! Someone must be buying into it, and since it is clearly not hedge funds, and retail investors probably have record unemployment to worry about, the answer must lie elsewhere.

Makes sense its CTAs, which are the computer-driven models, do not care about such trivial facts as mass layoffs, millions of people infected with a deadly virus, and instead they only care if others are buying at which point they too join the buying frenzy, making them the dumbest of momentum-chasing investors.

This pick-up in trend-following buying is getting a boost from the narrative among market participants having taken on a more positive tone, playing catch-up with a rebound that is already under way.

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