Could brussel sprouts be the new leading indicator for equities? They have made a helluva comeback, a resurgence and rebranding the likes of which no one has ever seen. Long gone are the days when entire episodes of sitcoms were devoted to the haters of the innocently hued green vegetable as we witnessed in Leave It To Beaver circa 1960-something. Put another way, Mel Gibson would have to convert to Hasidism to rival this return to flavor – I mean favor. BP’s, as those who have been closet lovers of this leafy cabbage affectionately refer to it, are ubiquitous on the menus of the finest restaurants, replacing perennial favorites such as string beans almondine. Barbecued brussel sprouts, brussel sprout hash, roasted brussel sprouts, Gordon Ramsey and Martha Stewart recipes – all trumpet their chicness. But what does this have to do with equities? The point is simple: the hate for brussel sprouts was much more deep seated than it ever was for equities. To wit: do you recall at any point in your adolescence, despising stocks, turning up your nose and running away from the table when your parents mentioned the stock market? Of course not. In fact, it was likely that your school had a stock market game or your parents talked about how they bought you 10 shares of DIS when you were born, a subliminal endorsement of the equities markets.
So if the despised and much maligned brussel sprout can make a comeback of heretofore unforeseen proportions, why not equities? In fact, the comeback has already started. Lipper reported that in January, equity and mixed equity funds brought in $62 billion, the largest monthly inflows in 6 years. Money also flowed into bond funds indicating that cash is likely coming out of the mattress and out of negligible yielding bank accounts. The flows continued into February, although US equity funds took a vacation last week from gathering assets which could be an indication that the market will soon follow (it has). But before getting too excited, let’s not forget that the indices have doubled since the market bottom despite massive outflows, thus, in the eyes of the bears, limiting the use of inflows as a correlation. And supporting the bear case is that long/short equity managers reportedly have the highest net exposure since 2008 at 50-60%. Price action shows us where the love has been spread: consumer discretionary reportedly the highest concentration, financials the largest increase and technology the second biggest underweight. When a feeding frenzy occurs, and we’re not quite there yet, asset values increase ergo the 8% run-up prior to this week. And for all the self-interested bond fund managers who believe we are not in a bubble, I caution them to start cutting back on their overhead or risk equity fund managers putting in a low ball bid in on their Hamptons homes, that is once they soak up the capacity from a shrinking sell-side equity business model. Not all the bond assets will flow into equities, but more than enough will find their way to drive the indices higher.
Despite having just experienced a two day sell-off, we are perhaps still overbought. And depending upon how much or if we further correct in front of the March 1st Washington deadline for mandatory cuts, we could actually trade higher into the event. Investors are unfortunately accustomed to Washington’s ineffectiveness and if you sold in front of the fiscal cliff, you missed a strong rally. So having stared down the abyss and survived quite nicely, I doubt a return engagement will be more than a nuisance for the market and, in any event, a much needed respite. The payroll tax impact may prove to be more of an issue but hopefully a strong jobs number on March 8th will be more of an offset.
And then there is the Fed, China and Europe. The tide seems to be turning in FOMC blather among the new entrants but is this just a case of the young just feeling their oats, only to be slapped down by the reality of a stumbling economy, or a change in true sentiment? Bonds remain a short. China has apparently adopted a bipolar monetary policy, easing for a few months then tightening, allowing the mixed with a downward slope but plenty of firepower and, hopefully, a rebuke of Hollande sooner rather than later.
So pick it: do you want to follow the path of brussel sprouts or do you believe equities more closely resemble Mel Gibson? I prefer to eat healthy rather than imbibe, although I have removed some of the spice by taking down beta.