A Cue From the Floor

As at the end of July 2019, the US cycle will be 121 months old, the longest since records began in 1857.1 We hear already the cries of “economic cycles don’t die of old age” and we respect that, but we still think the proximity of the peak is a legitimate conversation to be having.

In light of this, we have taken inspiration from David M. Darst’s legendary schematic of the asset price cycle. Darst categorised market cycles as having five stages, as shown in Figure 1. Each part of the cycle is characterized by a statement (shown in italics in the graph) about fundamentals, valuation and psychological factors.

We asked a number of our investment professionals to select where they thought we were in the asset cycle, both overall and within each of the three cycle components, and we have overlaid the results onto Darst’s schematic. Two observations emerge. The first is that, on the headline level, although the modal stage is ‘Mid’, the results are clustered such that it looks like we are on the cusp of moving from ‘Mid’ to ‘Peak’.

Secondly – and as we have outlined with blue rectangles – currently, Fundamentals are leading Valuation, which is leading Psychology. In Darst’s original work, he found that the weighting of these three components was 40/30/30 in Mid, moving to 20/20/60 in Peak. In other words, historically you know it’s peak-time when buoyant sentiment starts to run away from you. This confirms both what our survey has told us – i.e. we may be close to peak but not there yet – and recent readings of positioning data: Morgan Stanley’s prime brokerage numbers have moved up since the lows of the fourth quarter of 2018, but are still nowhere near all-in; CFTC net non-commercial positions out of open interest are running at negative 3-year Z scores for both the S&P 500 Index and the Nasdaq; and State Street’s Global Institutional Investor Confidence metric is still around all-time lows.

So, we will be watching closely for sentiment indicators to start picking up. However, in the meantime, the cue from this floor is that there may be life in the old bull yet.

Figure 1: The Dot Plot

The Dot Plot

Source: Man Group, inspired by David M Darst; Survey conducted between March 1 and March 31.

European Equity Yields: A Silver Lining

If there is a silver lining in Europe, especially against low risk-free rates, it is European equity yields, in our view.

As Figure 2 shows, there is a notable gap between the cash yield (calculated as the dividend yield and buyback yield) and the 10-year bund yield. Additionally, almost 80% of European companies have a dividend yield greater the corporate bond yield (Figure 3). This compared with just 20% of US companies that have a dividend yield greater than the corporate bond yield.

Indeed, this yield characteristic may be valuable, especially against a backdrop of growth being very highly rated: high-growth stocks are trading in their highest premium to low-growth stocks since 2000, according to Goldman Sachs (Figure 4).

Figure 2: A High Gap Between European Cash Yields and Bund Yields

A High Gap Between European Cash Yields and Bund Yields

Source: Datastream, Factset, Goldman Sachs, as of March 29, 2019

Figure 3: Dividend Yields Are Higher Than Corporate Bond Yields

Dividend Yields Are Higher Than Corporate Bond Yields

Source: Datastream, Factset, Goldman Sachs; as of March 29, 2019.
NOTE: Corporate bond yield is 75/25 IBOXX Euro corporate yield/ IBOXX sterling corporate yield for Europe and the 5-year BBB-corporate bond index for US.

Figure 4: Premium of High-Growth Stocks to Low-Growth Stocks

Premium of High-Growth Stocks to Low-Growth Stocks

Source: Datastream, Factset, Goldman Sachs; as of March 29, 2019.
Europe represented by Stoxx Europe 600 Index; US represented by S&P 500 Index. High sales growth >8%; low sales growth <4%

With contribution from: Pierre-Henri Flamand (Man GLG, CIO) and Henry Neville (Man Solutions, Analyst).

1. Source: NBER

Download Full Article

Important information

Opinions expressed are those of the author and may not be shared by all personnel of Man Group plc (‘Man’). These opinions are subject to change without notice, are for information purposes only and do not constitute an offer or invitation to make an investment in any financial instrument or in any product to which the Company and/or its affiliates provides investment advisory or any other financial services. Any organisations, financial instrument or products described in this material are mentioned for reference purposes only which should not be considered a recommendation for their purchase or sale. Neither the Company nor the authors shall be liable to any person for any action taken on the basis of the information provided. Some statements contained in this material concerning goals, strategies, outlook or other non-historical matters may be forward-looking statements and are based on current indicators and expectations. These forward-looking statements speak only as of the date on which they are made, and the Company undertakes no obligation to update or revise any forward-looking statements. These forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those contained in the statements. The Company and/or its affiliates may or may not have a position in any financial instrument mentioned and may or may not be actively trading in any such securities. This material is proprietary information of the Company and its affiliates and may not be reproduced or otherwise disseminated in whole or in part without prior written consent from the Company. The Company believes the content to be accurate. However accuracy is not warranted or guaranteed. The Company does not assume any liability in the case of incorrectly reported or incomplete information. Unless stated otherwise all information is provided by the Company. Past performance is not indicative of future results.

1635977/US/GL/R/W

Please update your browser

Unfortunately we no longer support Internet Explorer 8, 7 and older for security reasons.

Please update your browser to a later version and try to access our site again.

Many thanks.