SocGen: "Fundamentals Are Always Strong When Sell-Offs Begin"


The point being that at the top, economic fundamentals always look strong and this is why interest rates are going up. It is interest rates, not growth, that is the concern.


Lapthorne then shifts focus, and echoes an analysis conducted by Goldman's David Kostin last Friday...

... namely how long it takes to recover from your index price loss.

Here, the mild corrections in 1998 and 1999 took under 90 trading days to get back to the initial index level. This compares to the 2000 and 2007 corrections which took over 1800 and 1400 days respectively to recover the prior price level.


In such long draw down periods, the compounding dividend takes on added performance, as in total return terms although you made no money in price terms from 2000 to 2007, at least you made 12.5% via the dividend. Another good reason to avoid dividend cuts.


Finally, looking at the composition of the selloff, SocGen notes that so far we have seen very little in the way of fundamental stock price discrimination. Specifically, during the worst day of selling, we saw some of the lowest ever cross sectional stock dispersion for a down market of such magnitude.


"In brief it looks like investors were selling markets, not stocks, a fact also reflected in the initial outperformance of small-caps versus large-caps."


To Lapthorne, the next market phase is key: do markets simply shrug off the sell-off and resume business as usual, or do they start differentiating?


We’ve clearly been arguing for a while now that holding balance sheet risk in an era of rising interest rates and higher market volatility has limited upside but significant downside. That view has only become reinforced by the recent market turbulence.


So far today, they are once again "simply shrugging it off", and judging by the wholesale rip in stocks just as fundamentals were ignored on the downside, so they will be forgotten on the rebound.

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