With the calendar quiet and seemingly half the Metropolis on the ski slopes, how may FT Alphaville not be intrigued by evaluation that mentions a “loss of life zone”?

Morgan Stanley has seized upon the week’s alpine overtones with some mountain-themed fairness technique, with some attention-grabbing takeaways on the sprint to trash we’ve seen to date in 2023.

Michael Wilson and friends have their eyes on fairness threat premium — they warn that this gauge of potential upside has plunged to its lowest ranges within the post-financial-crisis period:

With the Fairness Threat Premium at its lowest degree since 2007, the risk-reward for shares is extraordinarily poor, significantly with a Fed that’s seemingly removed from achieved, and earnings expectations which might be 10-20% too excessive. It’s time to go again to base camp earlier than the subsequent information down in earnings.

They reckon:

— Robust current knowledge has “taken a Fed pause/pivot utterly off the desk”
— Regardless of bearish vibes, “each energetic institutional and retail traders are extra bullish than they’ve been in over a 12 months”
— Earnings per share development and gross sales development have change into disconnected, which implies an EPS slowdown looms

The current fairness rally has been fuelled by a shocking abundance of liquidity, even because the Federal Reserve strikes to tighten financial coverage. Moderately than preventing (or not preventing) the Fed, merchants ought to take a extra world view, says Morgan Stanley:

[We] suppose the first cause for why shares have been rallying since October has to do with the plentiful world liquidity that has been supplied from the PBoC, BOJ and weaker USD slightly than any dovish change from the Fed . . . 

[We] consider the “offset” from the PBoC, BOJ and weaker greenback has greater than cancelled out the Fed’s effort to tighten monetary circumstances which have loosened significantly from October ranges.

They proceed:

The inconsistency of the value motion between shares and bonds is an effective instance of false readings throughout a time when liquidity could also be clouding the elemental image. Maybe the strongest proof that the present setting is among the riskiest we now have witnessed since this bear market started comes from the most recent studying of our Fairness Threat Premium . . . 

With the ERP reaching simply 155bps final week, we consider the dangers are excessive now and practically unimaginable to justify with any narrative one needs to conjure up.

Right here’s that ERP “loss of life zone” in all its glory. (Shouldn’t the peaks be extra harmful in a mountain analogy? Winter sports activities lovers please remark under.)

The strategists say the current rally is a harmful phantasm, with the risk-reward on the S&P 500 now “very poor”:

That is pure FOMO at its greatest, in our view, and we discover all of the hoopla and pleasure concerning the YTD rally to be misplaced. The fact is that the S&P 500 is flat over the previous 11 weeks and precisely consistent with the place we took off our tactical bullish name on December fifth at 4,071. The primary distinction is that shares are actually considerably dearer with the ERP at 168bps versus 216bps again then.

They conclude, ominously:

Backside line, traders usually are not bearish any longer, and that is simply another excuse to be cautious of the set-up going into what’s more likely to be one other weak earnings season.

Keep secure on the market, skiers.