IQ Weekly Takeaways for 10 May 2020

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1) Stocks markets starting to look short-term overbought

2) Stock valuations at highest level since dotcom bubble

3) Prepare for US tax hikes in 2021

4) Negative rates in the US?

5) Equity volatility grinding lower

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1) Stocks markets starting to look short-term overbought

And none of our watchlist stocks are technically oversold. With the S&P 500 staging a more than 30% rebound from March troughs, some stocks that we actively track are starting to indicate overbought levels, based on some technical indicators such as 14-day RSIs and Bollinger Bands (see table below). Conversely, of the 175 stocks that we track on our Global Equity Watchlist, not a single one is technically short-term oversold at this point.

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2) Fundamental stock valuations at highest level since dotcom bubble

MSCI All Country World Index’s Fwd P/E reaches 20.7x. The new normal for forward P/Es might be higher now with risk-free rates nearing 0%. The MSCI All Country World Index’s forward P/E currently stands at 20.7x, almost 3 standard deviations above its 15-year average.

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3) Prepare for US tax hikes in 2021

Tax hikes might be an inevitability. With lower tax receipts this year from soaring unemployment and corporate earnings declines, while having to dole out government handouts, something will have to give.

But higher taxes are likely not yet factored into earnings forecasts by analysts. Tax hikes hit directly on corporate bottom lines, and unlikely to have been factored in current EPS estimates for 2021 onwards.

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4) Negative rates in the US?

Expectations for the timing of below-zero rates — as shown by contracts on the Fed funds rate — shifted to the middle of 2021 after earlier indicating this scenario as soon as December amid dour jobs data that showed the worst employment downturn in U.S. history.

https://www.bloomberg.com/news/articles/2020-05-08/traders-ask-why-now-after-negative-rates-persist-in-futures

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5) Equity volatility grinding lower

Selling options now gets you less. Take more caution when selling equity options (or buying equity-linked notes or fixed coupon notes), as implied volatility has declined substantially in the last month, compensating you with much less.