It’s tough being a market strategist.
Mike Wilson, chief equity strategist for Morgan Stanley, has thrown his bear towel on the laundry pile and lifted his year-end target for the S&P 500 to 5,400 from 4,500.
He’ll be braining himself with a brick if the S&P 500 declines.
With Wilson joining the bulls, we’re left with only one big Wall Street bear, Marko Kolanovic at JP Morgan, who sees the S&P 500 potentially down 20% to 4,200 this year. Says Mr. Kolanovic, “We do not see equities as attractive investments at the moment and we don’t see a reason to change our stance.”
Nothing is harder on seers than seeing through a glass darkly. Perhaps the only harder profession is Old Testament Prophet. You’re right but you get killed anyway.
Economists and central bankers are plagued by no such accountability. In those professions, a track record inversely correlated with outcomes keeps the paychecks coming. Heck, weather forecasters can blow it worse without consequence.
But the weather folks have the wisdom to look out only a handful of days.
Since we’re coming to the conclusion of spring when it’s been traditional but not accurate to “sell in May and go away” in the stock market, I’ll tell you what we see as good and bad from our turret here at ModernIR.
Keep in mind we’re tacticians, not strategists. We can tell you the probability that, for instance, NVDA will rise or fall with results, and why. NVDA, up almost 100% this year, has average YTD Demand of 7.0 on a 10-point scale, and average short volume of 44%, well below the 49% marketwide.
Don’t fight that tape.
But we can also project NVDA down near $849, because the share of daily trading volume from Passive Investment is slipping. That’s the engine.
And we can calculate the probability of making money in stocks with Demand/Supply imbalances. Small gains, not big ones. Buy divergences, when options aren’t expiring, and when Broad Market Demand is also rising. Probabilities.
The point is, the market is a very short-term vehicle. Quantitative money is a third of assets now. Combine quants with indexes and ETFs, and it’s two-thirds of assets. So there’s a 67% probability that math, not fundamentals, will determine direction.
And what drives quant money? Allocations to equities, the probability of a return. If allocations decline, or probabilities diminish, it doesn’t matter how much money companies with publicly traded shares are making.
Money drives outcomes.
The good news is the amount of money needing exposure to equities continues generally to rise, although the Investment Company Institute’s 2024 Fact Book shows some outflows in 2023, believe it or not.
Passives, which need big, stable, liquid stocks dominate the market. Nearly 70% of 401k plans use target-date funds – which depend on allocations to equities, not individual stories. And Passives win because they cost five basis points versus 65 basis points on average for Active funds (says ICI.org), which don’t beat the benchmark.
So money will choose big, liquid stocks, which will propel benchmarks generally up.
All other things being equal.
Now, in the short run the VIX expires today, spreads are too low, Demand is peaked, Supply is rising. Could get a shudder.
But the probabilities are positive.
What’s the bad news? Economically, people may run out of money. If they do, they’ll stop allocating funds to these plans. Demand from the big engine of the stock market, Passives, will dry up.
And if the stock market stops rising, people get antsy and want to cut exposure to equities.
And it’s hard to get money out of the stock market because the trade-size is now 90 shares. Try jamming some percentage of $34 trillion – what the ICI says is in US retirement accounts – out the door 90 shares at a time. You’ll tear a wall off.
That’ll happen sometime.
And am I concerned that net interest expense for the US government is $625 billion through Apr 30 (publicly downloadable data from the Treasury Dept) and thus on track to push past $1 trillion for the fiscal year?
Yes.
And I’m concerned that where a global crisis should have made us leaner, fitter, tougher, financially as a country, we’ve done the opposite. The US government will sell $20 trillion of debt this year.
And that erodes purchasing power and fuels inflation. And people are running out of savings and can’t afford stuff. Where the assets are 70% Passive, the economy is 70% consumption.
That’s the bad news.
But what drives the stock market is flows. Money. Models. Short-termism. We make no predictions. We just watch Demand and Supply.
And so should you.
