Wednesday, February 3, 2016

The Last Time These Five Outlier Events Coincided Was In February 2009......

The Last Time These Five Outlier Events Coincided Was In February 2009

The investing community is gripped by a "growth scare" and the S&P 500 has been struggling since the start of the year and markets remain extremely on edge given the multitude of risks facing the market.

Here is a list all the things that can go even more wrong from here on out:

China: China is navigating an extremely challenging balance of slowing credit growth/expansion while transitioning growth from an investment-oriented to consumption oriented model. The structural changes over the past decade have resulted in China and its EM neighbors increasingly operating as an ecosystem, with the US less affected by "shocks" in China.

Commodity producers: Commodity producers are seeing increasing financial stress, stemming from falling volumes and prices, currency weakening and diminished confidence by capital markets.

Deflation: Falling inflation and the pernicious effects of deflation weigh on markets–particularly since, debt burdens become very difficult to manage in a falling pricing environment.

Credit cycle: Default expectations have risen in 2016, stemming concerns about falling commodity prices and reduced market liquidity. Investors have pulled nearly $80 billion from high-yield mutual funds over the past 18 months.

Policy divergence: Lastly, investors worry about policy errors from Central Banks. The Fed is tightening while other major countries are easing. Hence, the fear of a continued surge in USD and therefore more headwinds to US corporates.

The chart below superimposes the confluence of five distinct, and troubling events/ issues for risk, 1- and 2-standard deviation events which are taking place currently, and highlights that the last time all 5 occurred at the same time was in February 2009.

Here are the 5 outlier events:

HY spreads above 800bp;
oil down at least 25% yoy;
S&P 500 EPS is negative yoy;
Technicals are weak (% of stocks above 200d is below 15%)
sentiment is terrible (AAII).

And here is the visual history of the confluence of all these five events over time.

What happened in February 2009?  The S&P 500 was crashing and in clear free fall.

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