When this bull market comes to an end, the immediate cause will not likely be from our shores as was the case in 2000 and 2007. Despite most major equity indices in the U.S. closing at new all time highs yesterday, European equities, particularly their bank stocks, trade downright awful on a relative basis. The Euro Stoxx Bank Index (SX7E) is one of the worst looking charts I have seen of late, now trading less than 2% from its 52 week closing low made on October 16th:
Despite the index being up 35% from its 2013 lows, there are some of its large components that have failed to keep pace, most notably Deutsche Bank (DB) which trades like the European Sovereign Debt Crisis never ended, down 34% on the year and down 42% from the 52 week highs made in January:
I am a pretty simple guy when it comes to most things, but I am hard pressed to think that there can be economic weakness in Europe, Russia, Brazil and China without some sort of re-set (or more sustained than the 2 week sell off we saw last month) in risk asset prices here in the U.S.. Again, I don’t manage other people’s money, I don’t create asset allocation models. I sit at my desk Monday through Friday staring at my screens looking for interesting trade set ups. As you can imagine there are very few “set ups” that screen well for taking a bearish view near term, and even less bullish long term.
So for the last few weeks, since the bottom in October I have been sitting on my hands a bit as it seems like the fix is in for 2014. But, if we continue to have the sort of divergence in economic results that we are witnessing in some of our closet trading partners, and the price action in their risk assets continues to deteriorate I suspect that our equity markets will not be immune not matter how loud or for how long the Fed tells us rates will stay low. I suspect this is a Jan/Feb 2015 thing, but with the SX7E and stocks like DB acting the way they do, a sort of black swan event could be on tomorrow morning’s front page.
My friend Michael Batnick who writes a great blog call The Irrelevant Investor tweeted the following yesterday:
Can you literally imagine owning stocks, AT THESE LEVELS?!?!?!?
— Irrelevant Investor (@michaelbatnick) November 11, 2014
I think Mike would have used a sarcasm font if available, but not the way you think. I suspect his point is how wrong skeptics are in this market. People could have made the same cautious against buying equities at 1800, 1900, 2000 etc.
It’s been an easy trade to buy every dip, stay long and strong. And I can’t argue with those results. Whether your form of risk management is diversification/asset allocation, puts, cash, gold, bitcoin, bomb shelters, it may make sense to revisit how you implement said risk management, and have a plan, because if we go back an test last month’s lows in the S&P 500 in the coming months I suspect the draw-down will be a bit more pronounced and investors who did not sell for tax reasons in October may be far more inclined to do so early in the new year.
Oh and one more thing, incase you missed this headline from Bloomberg: NATO Says Russian Troops Enter Ukraine as East Risks Open War The potential for another flare up in Ukraine is NOT being discounted by most global risk assets, and any additional provaction by the Russians at the very least means wider economic sanctions which makes an economic recovery that much more challenging in 2015. I am not in the camp that thinks the U.S. economy can de-couple from a recessionary Europe.