The summer of swings

Up, down, flying around, looping the loop and defying the ground, those magnificent men in their flying machines. What a great film that was, Terry Thomas et all, Eric Sykes, and many other great British comics. Rather reminds me of what’s happening in the US stock market currently. Quite the sell-off at the end of last week, a recovery on Monday, followed by the roller coaster that was yesterday, with the S&P 500 down almost 3% at one point, only to recover most of the losses by the end of the day. Iran shooting down a US Apache helicopter and Trump avowing revenge appeared to be the catalyst for the initial sell-off. The good news is a deal is still only days away.

We have discussed the dispersion in sector performance in the past few months, and a few market strategists now see warning signs, noting that the gap between the best and worst S&P performers is at levels not seen outside major incidents. They point out that the earnings upgrades that have contributed to the rise in the US stock market this year, and by default the MSCI index, are highly concentrated in a few stocks, which we can all guess fall into which sector. 99% of the rest of the MSCI World Index have seen very modest earnings upgrades.

The disparity of where differing strategists see the year panning out is quite stark, more so than usual, I would say. Bank of America has the S&P 500 at 7100 by year-end, based on the belief that dispersion in performance within this market is pushing the most expensive stocks (judged by forward p/e multiples) to outperform cheaper companies. No doubt that’s unusual, but apparently tends to happen before selloffs or bear markets. You have others with targets over 8,000, believing that earnings momentum will drive further gains.

Such a difference from the start of the year, which saw performance broaden across sectors on hopes that US interest rates would ease this year, helping to spark a broader rally. Whereas the consensus is for no change, next week’s meeting will be more interesting than most. The outcome is likely to be no change to rates; it’s the tone Mr Warsh sets. Will he manage to set a dovish tone and drag out that old data-dependent nonsense, or will his fellow members demand a price for keeping interest rates where they are by pushing him toward a more hawkish message?  A dovish stance would encourage a sector rotation away from tech and might, in a strange way, be the catalyst for a larger, maybe healthy, correction.