Despite the familiar hype about "new all-time highs" the continued ascension of US equity benchmarks has been misleading. The breadth of the US equity market has declined further in recent weeks. Key US equity benchmarks have become so concentrated that they no longer measure the "stock market". The international out-performance of US equity benchmarks is attributable entirely to a small group of large cap tech growth stars. Without their contribution all developed equity markets have remained in a phase of consolidation since early June.
One important message of the summer is that the attempt to push longer-dated yields of US Treasuries below the 50bpts area has failed. The decline in real, inflation-adjusted yields of US$ debt now appears to be exhausted.
The divergence between US equity values and their implied volatility at the end of August is raising a warning flag. Investor positioning in option markets appear to be grossly imbalanced. We expect equity markets to be more disturbed in this phase. It will be more difficult to sustain positive economic surprises from this time, especially in Europe. Expectations have become more positive. At the same time in many major economies the pace of removal of restrictions upon travel and social interaction has slowed.
Our perception is that the rise of the S&P500 should stall this month in the zone between 3500 and 3650. A period of market consolidation will probably precede any correction. We do not think that the break-out of European equity from their range of consolidation - the area between 3000-3100 and 3400-3500 of the DJES50 - will happen in what remains of this year. The failure to break out to the upside at this time should give rise to a test of the downside before the year is complete.
Author:
Thomas Neuhold, CFA
Head of Austrian Equity Research
Kepler Cheuvreux
4 September 2020
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Note
Wiener Börse AG would explicitly like to point out that the data and calculations given in this report are historic values, which do not permit any conclusions as regards future developments or value stability. Price fluctuations and loss of capital are possible in securities trading. The contribution is the personal opinion of the analyst and does not constitute a financial analysis or a recommendation for investment by the exchange operating company, Wiener Börse AG.