"What If?"
By Tyler Durden
Via ConvergEx's Nick Colas,
Today we offer up five market counterfactuals – “What ifs” – to both illustrate why large cap U.S. equities just closed near their highest levels of 2016 and consider the conventional wisdom about whether the current rally is sustainable.
Our home base: where asset prices and other trends started the year.
For example, global interest rates began 2016 at much higher levels: the U.S. 10 year at 2.24% (now 1.80%), German Bunds at 0.64% (now 0.11%) and Japanese government bonds at 0.27% (now -0.28%). Where would U.S. equities be if global yields were unchanged this year? (Spoiler alert: lower.) Or consider crude oil prices, up from $37/barrel to $49/barrel, lifting large cap energy stocks by 11% and responsible for 25% of the S&P 500’s gains YTD. Then there is the recent worry over global smartphone sales and what that means for mega-cap Apple (still 3% of the S&P 500), which has clipped market returns by 0.21% (7% of total). The dollar – down 3% in 2016 – is another item on the “what if” list, but the elephant in the room is “What if Donald Trump were not the Republican nominee?” Markets seem to have ignored him for now, but can that continue into the general election season?
What if President John Kennedy had rolled out of Dealey Plaza unharmed? Would he have avoided a larger military entanglement in Vietnam? Or more quickly embraced the civil rights movement than his successor? Would it have been John Jr running for President in 2008, or now? And would Marilyn Monroe ever have become first lady, as she reportedly told Jackie was her goal?
The term for that kind of scenario analysis is “Counterfactual thinking” – considering possible alternative events to those that actually occurred. What if you had majored in Classics instead of Business, or married someone besides your current spouse? How would your life be different? Would you be happier? Poorer, but happier? (Yes, that’s a thing.)
Today we’ll unpack the current U.S. market through the lens of 5 counterfactuals, all anchored in a prior reality: where the world was 155 days ago, at the end of 2015. Our goal is to highlight what has taken the S&P 500 to its highest point in 2016 and assess the sustainability of current valuations and market dynamics.
#1: What if global interest rates were the same as 12/31/2016?
Since the start of the year, global long term interest rates have fallen dramatically:
? US 10 year Treasuries went from a 2.24% yield to 1.80% today.
? German 10 year Bunds yield just 11 basis points now, down from 64% bp on New Year’s.
? Japanese 10 year government bonds now sport a negative 11 basis point yield, down from 27 basis points at the start of 2016.
The reasons for these declines are largely due to punk economic …read more
Source: "What If?"
