On November 13, Fidelity Investments’ Director of Global Macro Jurrien Timmer posted an analysis on the American stock market to LinkedIn. His research offers a sophisticated view of the market’s present condition and potential future development.
Equity Market Recovery: Timmer starts by talking about how stocks are still recovering, which shows that the market could break out of a holding pattern that has been going on for almost two years. He cites parallel periods of inactivity in 2018 and 2015 to demonstrate that they are not exceptional.
According to Timmer’s analysis of market movements and probabilities, the stock market is on an upward trajectory somewhere between 60 and 70 percent of the time. It is possible, he says, that the present trading range is setting the stage for another market rally. The present phase, he says, seems to incorporate both price and time adjustments in the market.
The intricate link between price-to-earnings (P/E) ratios and market returns is a topic he covers in his talk on the price-earnings relationship. Timmer points out that market timing is made more difficult, in particular at cyclical inflection points, by the fact that the P/E component typically swings inversely to the earnings element.
Timmer notes that stock prices, although not always correct, are a reflection of profits expectations. He said that optimism about future profits has fueled the market’s rise over the previous 13 months. This is supported by the rise in the P/E multiple from the low in October 2022 to the current level of 20.3x.
Timmer claims that the market has been affected by the recent spike in yields. He points out that the profits from the P/E multiple increase have been cut in half due to the rise in rates in the fall.
Timmer notes, thankfully, that profits have been performing well. EPS for the third quarter increased by +4% year over year, with 458 out of 500 businesses reporting. When compared to projections made at the beginning of earnings season, this expansion is staggering.
He wraps off by noting a downward trend in earnings projections for the next two quarters, the fourth quarter of 2023 and the first quarter of 2024.
Timmer begins by talking about gold’s five-year performance and Sharpe Ratio. The Sharpe Ratio, which analyzes risk-adjusted returns, demonstrates that gold has been a solid and trustworthy investment, exceeding many other assets in both returns and volatility.
According to Timmer, Bitcoin has a different risk-reward profile than gold. Although the positive link between Bitcoin and stocks is less than that seen with other assets, it is still there. Bitcoin’s behavior under different market situations may be better understood with the help of this connection.
Timmer then discusses the place of Bitcoin and other ‘alts’ (alternatives) in a conventional 60/40 portfolio (i.e., 60% equities, 40% bonds). It seems that Bitcoin is losing its positive relationship with the S&P 500, and it is losing its positive relationship with the US Dollar and T-Bills. To my knowledge, there has been no correlation between Bitcoin and gold, which suggests they may not be interchangeable in a portfolio.
The convergence of Bitcoin and gold Sharpe Ratios is a major finding in Timmer’s study. While gold has continuously fared well, Bitcoin’s Sharpe Ratio implies a mature market behavior, despite its previous volatility.
Timmer also draws a parallel between Bitcoin and gold in terms of volatility, pointing out that the former is about four times as volatile as the latter. Gold’s return profile over the last five years is quite similar to Bitcoin’s if you theoretically double your gold holdings to match Bitcoin’s.
Timmer proposes a possible allocation approach for an alternate 60/40 portfolio based on these characteristics. In terms of risk and return, a 2% gold plus 1% Bitcoin allocation may be the same as a 6% allocation to a ‘store of value’ asset class.