Those that follow my personal account on Twitter will be familiar with my weekly S&P 500 #ChartStorm in which I pick out 10 charts on the S&P 500 to tweet. Typically I'll pick a couple of themes and hammer them home with the charts, but sometimes it's just a selection of charts that will add to your perspective and help inform your own view - whether its bearish, bullish, or something else!
The purpose of this note is to add some extra context beyond the 140 characters of Twitter. It's worth noting that the aim of the #ChartStorm isn't necessarily to arrive at a certain view but to highlight charts and themes worth paying attention to.
So here's the another S&P 500 #ChartStorm write-up!
1. Long Term Perspective on US Stockmarket Volatility: First up this week is a look at an alternative indicator of stock market volatility. It shows the rolling annual count of daily price changes exceeding +/- 1%. The key point on this one is that it has turned up sharply from a 50-year low. But as with the title of the chart, the open question is "now what?". Bulls will say it's just a repeat of 1997 where volatility went higher as stocks went higher. Bears will say it's an ominous parallel to 2007 where volatility turned sharply higher as stocks rolled over into a major bear market and subsequent crash and financial crisis. I would say we probably are in form more volatility as globally the monetary policy tides are turning (as the economic pulse is good).
Bottom line: This measure of volatility is turning higher from a 50-year low.
2. High yield credit vs the VIX: Staying with the topic of volatility, and moving in to the credit markets, the next chart shows that typically there tends to be a reasonably close link between equity implied volatility and high yield credit spreads. Overall across history equity market volatility tends to be more erratic, but what's really interesting is how credit spreads basically slept through all the market volatility of earlier this year. This is one reason I've erred on the bullish side short-term (i.e. the lack of spillover or broad bearish signals).
Bottom line: Credit spreads basically slept through the flareup in stock market volatility.
3. S&P500 vs High Yield Credit Spreads: Taking a slightly different angle, the next chart from Tiho Brkan of the Atlas Investor shows credit spreads against the level of the S&P500. You can see that credit spreads were rising into the 2015/16 corrections, and blew out materially. The reason is that there was very real fundamental drivers of those twin corrections (emerging market recessions, the commodity crunch)... and equally there was a fundamental reason for a rebound (big central bank easing by the ECB/BOJ/PBOC). So with credit spreads this well contained, it makes sense to postulate that the equity market correction has been mostly a sentiment issue.
Bottom line: In contrast to the 2015/16 corrections, credit spreads have been calm.
4. US vs Global Equities: If the previous two charts dealt with an apparent decoupling of credit and equities, the next one shows a giant decoupling between US and global equities. It stands in stark contrast to the late 80's and early 90's where global ex-US equities has somewhat of a golden age. And again, as with the first chart of this week's chart storm, it leaves an open question as to whether global equities ultimately catch-UP, or if US equities will ultimately catch-DOWN. From a valuation standpoint, just about every metric I look at points to compelling relative value in global ex-US equities, of course, valuation is only one factor.
Bottom line: US equities have decoupled from global equities ex-US.
5. Presidential Cycle: As we head towards the end of Q2 (yep, nearly half the year is gone!), it's worth keeping in mind this chart from Oppenheimer technicals which shows the long term average experience across the presidential cycle. Typically this quarter and the next are the worst performing stretch of the 4-year presidential cycle. It's worth keeping in mind that seasonality and cyclicality patterns can break down, an there can be a lot of dispersion around those average returns. However, at the margin it is something to be aware of.
Bottom line: The presidential cycle is historically at its most bearish right about now.