Equity investors are hoping that the stock market normailizes, but in a secular bear market “hope is a killer,” Albert Edwards noted in a research piece today, as he points to a conclusion that the longest bull market since 1945 has come to an end.
Albert Edwards: “We are now in a bear market”
The always entertaining global strategist for Societe Generale, Albert Edwards, did not disappoint in his August 27 Alternative View piece titled “Listen to the equity market’s heartbeat and embrace your inner bear.” Using sometimes dramatic language interlaced with logical pessimism and economic and fundamental modeling, Edwards says the party is over.
“In a secular bear market being wedded to hope destroys portfolios as the bear slashes to ribbons the hard-fought gains of the previous bull market,” he wrote. “Gains that have taken years to accumulate are gone in months. One key measure we monitor informs us conclusively: we are now in a bear market.”
Edwards notes that “most investors only realise the economy is in a recession well after it has begun,” as he calls “touching” those investors who look to China and think the U.S. can withstand further devaluation of the renminbi. Even if the U.S. does fight back China contagion, pulling QE 4 out of his holster and shooting down free market reactions to Chinese currency maneuvers, it won’t be enough. In the end Mr. Market will re-assert its authority. “But let me be as clear as I can: the US authorities CANNOT eliminate the business cycle, however many QE helicopters they send up,” he wrote.
To back up his bear thesis,Albert Edwards turns to Andrew Lapthorne, head of quantitative equity research at Soc Gen. Lapthorne’s proprietary indicators show that “a key predictor of a bear market registers a 99.7% probability that we are already in a bear market…”
Albert Edwards: Fundamental equity data is a forward looking indicator
The indicator to which is being referred was developed this March with the express purpose of determining when this current bull market cycle, among the statistically longest in history, would be ending. The model is broken down into macro (economic) indicators, which remain generally bullish, and fundamental (equity data) indicators, which are showing troubling signs the seemingly never ending bull market in stocks is over.
“Mr Market is telling us something that is not apparent in the economic data,” he says, as he examines the first fundamental model that considers the percentage change in S&P 500 operating profits, debt asset ratios and Return on Assets (ROA) analysis.
Edwards: The one correlation that is an omen
While the first fundamental model is troubling, it is the third fundamental equity data model that Edwards finds most troubling. This model considers market internals and notes a troubling correlation among high quality stocks, with strong balance sheets, and momentum. “Price momentum and quality strategies (are) becoming closely linked, with a 90% correlation,” he wrote. “Quality is now essentially price momentum and history tells us when these two strategies collide the omens are not good as it is a phenomena associated with equity bear markets.”
Economic data, Edwards reminds readers, seldom provides investors an accurate view into the future. Better to look at equity data to see the bear in the forest through the trees. “So rather than looking at the economic data and reassuring ourselves that because it looks okay, and no recession can be in the offing, we should instead mindfully feel the heartbeat of the market. It may be giving good warning of what is to come,” he wrote.
