Positioning and Massive Policy Support
April 17, 2020
Equity positioning remains extremely favorable and should keep the balance of risk skewed to the upside. As I alluded to in the Snapshot section above, there are early signs of systematic funds returning to equities. These strategies (mainly CTAs and Volatility Targeting ) are heavily underweight equities at the moment, but may soon return based on rapidly declining volatility and the S&P 500 approaching its 12-month moving average VWAP of 2862.
Why? More than 80% of the S&P 500 will be reporting over the next three weeks. Top down consensus 2020 S&P 500 EPS estimates have declined about 25% from their peak in January but there is massive dispersion between estimates. The dispersion is a sign of uncertainty, which almost always comes with a discount, except during periods of massive stimulus. The monetary and fiscal policy response to date is unprecedented with the Fed’s balance sheet recently expanding to $6.42T and likely on its way to >$10T. The narrative on Covid-19 shifted this week based on faster than expected containment results from Western economies. There had been a concern that Western privacy values would make the process of reaching peak outbreak far longer and more painful than what China experienced. Given a new narrative for reopening the economy, any 2020 earnings estimates become almost irrelevant as investors have already shifted to 2021 and beyond. And any historical framework around acceptable multiples during a recession (~10x-13x) may be invalid because this time really is different. This is the first recession caused by government telling workers to stay at home and this is the fastest and largest policy response ever seen.