Morning Notes — Multiples to Remain Elevated

SPX: As discussed on Friday, the main driver behind the rally to date is extremely light equity positioning among all investor categories. Individuals, long-only managers, hedge funds and systematic strategies (CTAs, Vol Targeting etc) are all underweight equities. The initial ~17% bounce off the 3/23 lows followed rising expectations for increased Fed liquidity measures in the $2T fiscal stimulus bill. Credit spreads narrowed and a corporate funding crisis was averted. That rally faded a bit until the Fed included investment grade corporate bonds in its QE plans. The SPX rallied into technical resistance at ~2750 until Thursday 4/9 when Fed Chair Powell addressed concerns over the policy support and the potential for resulting moral hazard. Basically, if the impending recession is no one’s fault, there can be no moral hazard. The logic is simple and almost translates into an indirect backstop for equities, which results in small pieces of good news driving larger than expected SPX rallies into a range that includes several popular systematic buy triggers.

More: The Fed’s message to essentially ‘make you whole’ eliminates any historical framework around PE multiples during a recession. The stimulus is unprecedented and so is the message, so there’s no reason why the SPX can’t trade at a forward multiple in the mid-20s. I won’t do the math, because you’d laugh at the target, but I think we should expect a prolonged period of time when markets stay disconnected from fundamentals.