When it comes to Wall Street permabulls, no one name sticks out more than that of FundStrat's (formerly JPM's) Tom Lee. Which is why, when even the traditional CNBC host during market up days, turns modestly bearish as he has in recent weeks and admits the investing community is gripped by a "growth scare" it is a notable event. As he writes, "the S&P 500 has been struggling since the start of the year and markets remain extremely on edge given the multitude of risks facing the market."
In a curious departure from his traditional happy go lucky style, Tom Lee then proceeds to list all the things that can go even more wrong from here on out:
There are many issues potential becoming so significant that the economy and markets succumb to the risks:
- China: China is navigating an extremely challenging balance of slowing credit growth/expansion while transitioning growth from an investment-oriented to consumption oriented model. The structural changes over the past decade have resulted in China and its EM neighbors increasingly operating as an ecosystem, with the US less affected by “shocks” in China.
- Commodity producers: Commodity producers are seeing increasing financial stress, stemming from falling volumes and prices, currency weakening and diminished confidence by capital markets.
- Deflation: Falling inflation and the pernicious effects of deflation weigh on markets–particularly since, debt burdens become very difficult to manage in a falling pricing environment.
- Credit cycle: Default expectations have risen in 2016, stemming concerns about falling commodity prices and reduced market liquidity. Investors have pulled nearly $80 billion from high-yield mutual funds over the past 18 months.
- Policy divergence: Lastly, investors worry about policy errors from Central Banks. The Fed is tightening while other major countries are easing. Hence, the fear of a continued surge in USD and therefore more headwinds to US corporates.
But Lee's latest note is especially notable because Lee lays out the following chart which superimposes the confluence of five distinct, and troubling for risk, 1- and 2-standard deviation events which are taking place currently, and highlights that the last time all 5 occurred at the same time was in February 2009.
Here are the 5 outlier events laid out by Lee:
- HY spreads above 800bp;
- oil down at least 25% yoy;
- S&P 500 EPS is negative yoy;
- Technicals are weak (% of stocks above 200d is below 15%)
- sentiment is terrible (AAII).
And here is the visual history of the confluence of all these five events over time.
What happened in February 2009? Just as the S&P 500 was crashing in clear free fall, it was the Fed which just a few days later, on March 6 2009 bailed out the market for the first time, when it unveiled its expanded QE1 just as the S&P hit its "generational low" of 666.
This time, QE has been dormant for over a year and the Fed just hiked rates.