Why US equities turned into "safety trade" -- aka Why we should not have freaked out

Stocks fell 4% in a few days ending last week and given the associated widening of HY spreads (leading indicator) and VIX term inversion (leading), prompted us to expect equities to fall to between 50D to 100D mavg, or 3,150.  Instead, we saw fierce 4-day rally recovering the entire loss.

A few things, in our view, contributed to this vertical rise:

- US growth outlook improved, while RoW weakened --> US ISM beat, but German factory data missed, and Asia visibily weakening.
- A risk-off and defensive repositioning means a style tilt to Growth --> US is the large-cap growth index (57% growth)
- Risk-off means seeking liquid markets --> US is a large-cap index and RoW is basically small and mid-cap

In other words, the US stock market  is the safety trade when the RoW looks dodgy.  This is what we missed.  So even if credit is stressed (high yield wide) and VIX shows fear (which it is), in context of problems outside US, drives an OW into US stocks.  

POINT 1: THERE IS NOT ENOUGH S&P 500 TO GO AROUND... $25T MARKET CAP VS $300T IN HOUSEHOLD LIQUID ASSETS
The S&P 500 is about $25T in market cap and there is $300T of global household liquid assets.  Not counting Central Banks and not counting Corporate Cash.

- There is just not enough S&P 500 to go around.  Thus, picture the panic as money leave riskier regions and looks for US.  This causes the S&P 500 to spike.

Why US equities turned into safety trade -- aka Why we should not have freaked out


POINT 2: THIS IS EVIDENT IN THE OUTPERFORMANCE OF US EQUITIES VS REST OF WORLD, EVEN FX ADJUSTED
The best evidence of this is the outperformance of S&P 500 YTD compared to the rest of the World (see below).

- YTD, the place to be is in the US or Mexico (which is North America and tied to US outlook).

Why US equities turned into safety trade -- aka Why we should not have freaked out


POINT 3: THERE IS CONCERN ABOUT WEAKER GROWTH, HENCE INVESTORS BUY GROWTH STOCKS
Whenever growth outlook weakens, investors naturally buy growth stocks.  This is in force below as MSCI Growth went parabolic vs MSCI Value since Coronavirus fears broke.

Why US equities turned into safety trade -- aka Why we should not have freaked out


The S&P 500 is the largest and most liquid growth index and 57% of its weight is Growth.  Belgium has more Growth, but how is anyone going to get enough Belgium exposure at $300 billion of market cap vs $25T for S&P 500?

New York stylized skyline
Get instant access to this report
Complimentary Research to all of our visitors! Subscribe to receive three types of reports. Receive FSI Academy, Community Questions and Signal from Noise to you inbox every month.

Please enter your name.

Get Access Now

What is FS Insight?

FS Insight is a market-leading, independent research boutique. We are experts in U.S. macro market strategy research and have leveraged those fundamental market insights to become leading pioneers of digital assets and blockchain research.

View of Tom Lee icon

Tom Lee's View

Proprietary roadmap and tools to navigate and outperform the equity market.

Macro and Technical Strategy icon

Macro and Technical Strategy

Our approach helps investors identify inflection points and changes in equity leadership.

Deep Research icon

Deep Research

Our pioneering research provides an understanding of fundamental valuations and risks, and critical benchmarking tools.

Videos icon

Videos

Our macro and crypto videos give subscribers a quick and easy-to-understand audiovisual updates on our latest research and views.

US Policy Analysis icon

US Policy Analysis

Our 40-year D.C. veteran strategist cuts through the rhetoric to give investors the insight they need.

Signal from Noise icon

Signal from Noise

A gimlet-eyed look at financial markets, with timely investment ideas in concise and engaging prose.

Disclosures (show)