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S&P 500 Outlook: IPO Market Hints at Gradual Shift in Risk Appetite

S&P 500 Outlook: IPO Market Hints at Gradual Shift in Risk Appetite

2019-09-30 18:15:00
Peter Hanks, Junior Analyst
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S&P 500 Price Outlook:

  • An abysmal first trading week from Peloton (PTON) following its initial public offering (IPO) has helped to highlight the string of poor performances from newly listed stocks
  • Uber, Lyft, Slack, and Pinterest have also seen underwhelming returns
  • The relative performance between the broader S&P 500 and newly listed stocks with uncertain financials could prove that investors are becoming more cautious with their capital

S&P 500 Outlook: IPO Market Hints at Gradual Shift in Risk Appetite

The S&P 500 has climbed nearly 20% in the year-to-date, despite a plethora of economic and geopolitical headwinds. Nevertheless, accommodative monetary policy from the world’s most influential central banks has helped to fuel the bullish flame. With the advent of October and the fourth quarter, the current economic expansion looks to extend its record-setting streak.

At 123 months, the expansion is now comfortably the longest in the post-war period, but cracks have started to show with weakening economic data and the inversion of various yield curves. Further, investors have started to shy away from the cutting edge of risk appetite, the IPO market.

S&P 500 Price Chart: Daily Time Frame (January 2016 – September 2019) (Chart 1)

S&P 500 Price Chart and IPO Overlay

Chart created with TradingView

Since mid-August, the IPO ETF (IPO) has drastically underperformed the broader S&P 500, despite a modest climb in price for the latter. The fund, which offers exposure to a basket of newly-listed stocks, is arguably an approximation of considerable risk appetite given the nature of the underlying securities. Many of the securities, like Uber, Lyft, Peloton, Slack, Pinterest, Beyond Meat and Tilray have an uncertain path to profitability and therefore require investors to take on heightened risk. Given the current length of economic expansion and state of monetary policy, the necessary level of risk appetite has been achievable, but recent trends has seen demand for these fresh-faced stocks weaken.

S&P 500 Price Chart: 1 - Hour Time Frame (July – September) (Chart 2)

S&P 500 Price Performance Versus 2019 IPO Market Uber Lyft Peloton Slack

Chart created with TradingView

In addition to the apprehensiveness around new tickers, the decision by WeWork to cut their IPO valuation, before subsequently withdrawing their prospectus altogether, has further eroded appetite in the market. The company’s failure to launch could also speak to a gradual deterioration in the caliber of companies looking to go public – a phenomenon that would be more likely to materialize in a prolonged bull market. To that end, the relatively low number of offerings in the last three months could suggest a lack of quality companies looking to go public.

2019 Initial Public Offerings IPO Historical Chart

Data source: Bloomberg

While market participants can often maintain reservations regarding stocks on a case-by-case basis, the underperformance of the broader IPO ETF should elicit concern from equity investors. Like the recent rotation out of momentum stocks, subtle changes in demand throughout the stock market could speak to a gradual buildup in risk aversion. As the market enters the final quarter of 2019, traders are likely reminded of last year’s fourth quarter equity rout - which could bare some influence on the current themes the market is experiencing. As the year winds down, follow @PeterHanksFX on Twitter for further updates and analysis on emerging trends in the equity market.

--Written by Peter Hanks, Junior Analyst for DailyFX.com

Contact and follow Peter on Twitter @PeterHanksFX

Read more:Dow Jones, Nasdaq 100, DAX 30 Technical Forecasts for the Week

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