Talking Points:
- The S&P 500 is one of the most prolific 'risk' benchmarks due to the ubiquity of stocks, depth of US and volume on SPX derivatives
- To start this new trading week, the S&P 500 posted a remarkable gap higher to remove any doubt of its race to record highs
- Comparison between the SPX and many other speculative benchmarks shows a wide divergence - should we believe SPX or 'the crowd'?
The S&P 500 Is a Good Benchmark for General Risk Conditions
While not perfect, the S&P 500 does represent a strong benchmark for 'risk trends'. The index represents equities, which are one of the most popular asset classes for the average global investor. Further, it stands in for the United States whose economy and financial markets are the largest in the world. And, why is this particular index more appropriate to guide expectations than say the Dow Jones Industrial Average? Trading interest in the derivatives that support the S&P 500 (emini futures and the SPY ETF among others) are by far the most active in the speculative world. In short, this certainly has the chops for the job. However, being a leader for speculation can also mean a stand in for its extremes and distortions. Should investor sentiment be founded on a universal confidence in growth and yields with a healthy segment of unallocated funds available to spur further gains from risk-sensitive assets, this role would be one of considerable appeal for seeking out the best outlet in a rising tide. Yet, its use and value is significantly different when the hallmarks of capital markets for the past years has been complacency and stretching the bounds of value.
However, Its Signal for Confidence Diverges Widely from the Mean
As appropriate as the S&P 500 may be as a baseline for flawed sentiment, its more recent performance has deviated significantly from other comparable measures of risk trends. While most of the popular measures posted gains on the day, the general standing of these benchmarks are either substantially off their respective multi-year highs (much less record) or even just recently coming off significant lows. If we were to assume that equities are generally at preference regardless of the other aspects of choices, that would be quickly dispelled with a comparison of the S&P 500 to most of the major indices from across the world: the DAX, Nikkei 225, FTSE 100, etc. The most comprehensive measure for contrast is arguably the Vanguard All World ex US index (VEU) which shows a long recovery still ahead before it retakes its January highs. If this were just a measure of pure risk regardless of any qualifier aside from liquidity and stability, the EEM Emerging Market or HYG High Yield Fixed Income ETFs paint a very different picture. A measure of growth potential could present commodities as a speculative milestone, but the Dow Jones' DJCI index does little to verify those assumptions. Even the US-centric view finds contrast when we see the deviation in correlations with the US 10-year Treasury yield.
Find Conviction in the 'Market' not Specific Signals
As humans, we naturally look to seek patterns, signals and short cuts. A comparison of so many different assets reflects correlation that we can reasonable assess as causation - all of these markets are often synced in strong moves higher or lower when provoked by systemic changes in risk trends. However, sentiment is not always so systemically charged and it does not account for all of the movement in these various assets. With that considered, the deviation that we find from the S&P 500's tempo-setting run is not necessarily a trend that will be replicated with delay by or force convergence from other benchmarks. It is tempting to consider the US index a 'signal' that other major assets will soon advance to close the performance gap, especially if we have an existing bullish bias. However, it is just as likely that this is an anomaly that is only provided temporary advantage via traditional fundamentals, speculation or some unorthodox distortion. In evaluating intent like that projected by the S&P 500's remarkable gap to a record, we should assess the motivation that would support follow through. There is little reason to be so enthusiastic about general risk trends from growth projections to trade wars to monetary policy extremes. And, if we start from a fundamental evaluation rather than a technical one, it is likely that our analysis would support circumstances that more closely reflect VEU, EEM, Yen crosses or so many other risk baselines that are significantly lower than their respective records. That is perhaps why so many of these other measures are more closely related to each other in their historical ranges and why the S&P 500 is an outlier. We discuss the S&P 500's signal on risk in today's Quick Take Video.
