The mother's milk of stock market returns is turning increasingly sour...
Earnings season took a dark turn on Wednesday, according to MarketWatch's Ciara Linnane and Tomi Kilgore, when the majority of companies reporting numbers for the December quarter missed on sales and lowered their outlook for the rest of the year.
Over the past 7 years, we as well as others (if not those who believe in magic money trees, or managing other people's money while blogging) have repeatedly said that when it comes to "market" returns, look no further than the size of the Fed's balance sheet - the single best indictor of where the S&P500 is headed to next.
That is precisely what DB's Jim Reid did overnight. This is what he says:
Today we update a chart and table we used a fair amount in 2013/4 looking at the Fed balance sheet and equity and credit performance.
This morning's NYSE Options "break" created a panic buying ramp and now BATS reports that all BATS Orders will be rejected until further notice...
And surprise...
Investors today are focusing on the wrong asset class.
Stocks started off the year with one of the worst drops in recent memory. As of this morning the S&P 500 was down over 7% for the year thus far.
However, while stocks grab the headlines, it is the bond market that warrants the most attention.
The reason?
Firstly, size. The bond bubble is $100 trillion in size. To put this into perspective, the Tech Bubble, the single largest stock bubble in history relative to profits, was just $16 trillion in size.
Three weeks ago we wondered when Moody's would finally get the Freeport McMoRan joke when, with its stock crashing to unseen lows, it would finally cut investment-grade rated FCX (Baa3) to its rightful place deep in junk territory:
As we noted then "the US copper and gold producer has seen its 5-yr CDS spread trading at implied junk levels for the last six months. Troubles have intensified over the past month and credit spreads now imply a 79% chance of default within the next five years."