QuantStreet Capital

QuantStreet's March 2025 update?is out (https://lnkd.in/eNZAMbWw). A lot of the market price action in February had to do with uncertainty?about the Trump administration's policies. But not all the news was negative. The positives: * The Trump administration is planning?to reduce regulation, especially in the financial system?(https://lnkd.in/eVEdtFSw). This is a short- to medium-term positive, though perhaps long-term negative if it allows leveraged excesses to build unchecked. (Charlie Calomiris and I wrote about this recently: https://lnkd.in/gQzzf7jj.) * Methods of getting there aside, ending the war in Ukraine would be a boost to the world along many dimensions (https://lnkd.in/eVSdHDGi). The negatives: * DOGE uncertainty. Getting waste out of government?is laudable, but the process matters (https://lnkd.in/eUefZKNP). * Tariffs. Almost every economist thinks these are a bad idea (for example:?https://lnkd.in/e9KqenZM). * The complete debacle of a meeting between Presidents Trump and Zelensky (https://lnkd.in/ezVPJ_QJ). * Concerns about potential interference with the Fed (https://lnkd.in/ehmxHXP6). This would be a big negative if it happens, though we need to keep in mind that with the?Trump?administration there is often a lot of bluster that is then followed by reasonable?policies. More positives: * The recent conservative victory?in the German election is perceived to be business positive (https://lnkd.in/ebkKqb3P). * A good Q4 earnings season (summary in letter). * Extremely bearish investor sentiment--as is currently the case--tends to be a good sign (based on our limited analysis, see letter). In all, despite the many cross-currents, my feeling is these developments are a net positive for markets and growth. Time will tell.

First, it must be noted that President Trump clearly cares deeply about stock market performance (a video from Nov 2020: https://lnkd.in/eUrFNgt6). Second, it seems that just about everyone thinks a trade war with Mexico and especially with Canada is not a good idea. The WSJ "The Dumbest Trade War Fallout Begins": https://lnkd.in/ehWJYtn2 The FT "The absurdity of Donald Trump’s trade war": https://lnkd.in/eW9njmGm The Trump administration is also proposing a slew of business- and market-friendly reforms (https://lnkd.in/e3xb4uec). The silver lining is that the latest tariff salvo is probably a negotiating tactic rather than a long-term policy commitment.?Let's hope that is the case.

In QuantStreet's monthly piece, we take a look at January market performance. Bitcoin and gold lead the pack again, but surprisingly international stocks outperformed U.S. stocks for the first time in a while. Part of it might be a re-emergence of the thesis that the rest of the world can innovate like the U.S. on the back of the DeepSeek news last week. My sense is this thesis won't hold up (https://lnkd.in/eJsyuCBj). And there are already questions about the legitimacy of the claims (https://lnkd.in/eXyuuYYg). I don't see the AI infrastructure cycle slowing or the U.S. losing its technological edge. However, the valuation gap between the U.S. stock market and the rest of the world is so large, that for the U.S. to outperform, the burden on the U.S.-international earnings growth differential is very high. The problem is that as a short- to medium-term return signal, the valuation gap doesn't really matter. Nevertheless, diversifying a bit internationally seems warranted (this is not investment advice). Take a look at our monthly piece here: https://lnkd.in/eV-yUrwk

Thoughts on the DeepSeek selloff: 1) Markets have to have frequent really bad days to elicit a risk premium from investors. Without plunges like this--alongside the accompanying narratives of an end to AI infrastructure spend--stocks wouldn't be able to return 6-8% (or whatever your favorite estimate is) above bonds. No fear. No risk premium. 2) Narratives matter. How is it that some technical result from a small Chinese AI company can send shudders through global stock markets? Media (social and traditional) needs to seize on this event and create a compelling and eye-catching narrative around it. The more grandiose the narrative, the more clicks. So narratives tend to be grand. Listening to Bloomberg radio during my half-hour drive this morning makes very clear that nothing else matters as of right now besides DeepSeek. 3) Turning for a second to whether the narrative makes sense: It would, if society was already at the steady state of AI adoption, i.e., if AI was already doing everything that it could do or needed to do, then having a cheaper way of doing 90% of that would be a solution to the cost problem. Since AI is nowhere near doing what it can do, it's hard to understand how more efficient software would obviate the need for better hardware. My guess: This is a blip.

U.S. stocks have outperformed their international peers over the last several decades. Part of this outperformance has been higher earnings growth, which is likely sustainable going forward because of structural reasons (more pro-shareholder culture, rule of law, technological innovations, greater share buybacks, etc.). But part of the outperformance has been a growing gap in P/E ratios (as well as in price-to-forward-earnings ratios) and dividend yields. This valuation and yield gap is now so large that for U.S. outperformance to continue an ever-greater burden is being placed on the U.S. earnings growth advantage. In this piece we show that if P/E ratios and dividend yields revert to their means over the last two decades and if earnings growth equals its 20-year average, U.S. stock returns will lag those of international peers by several percent per year over the next 10 years. Scenario analysis shows that if U.S. P/E ratios mean-revert a bit—but not all the way back to the average—and if U.S. earnings over the next 10 years are truly stellar, U.S. stocks can still be the global leader. But the valuation and dividend yield gaps are so large the the earnings growth bar is very high. https://lnkd.in/eRFSTjij

In our latest piece we talk about the price action in December 2024 (largely a reversal of many of the Trump trades from November) and positioning for the coming month. We also discuss switching our trend signal from the last 12-month return to the return over the last 12 months excluding the most recent month. The academic literature has been making this adjustment forever, and it turns out with good reason! (December was a good example of the short-term reversals the skip-the-last-month adjustment is trying to avoid.) https://lnkd.in/eYur6H-8

The U.S. stock market’s CAPE (cyclically adjusted price-to-earnings) ratio is currently at an elevated level. Historically, when the CAPE ratio has been at these levels, the market’s return over the subsequent one- to ten-year periods has been low. Many are citing this as a reason for why the U.S. stock market is “overvalued” and potentially an unattractive investment. However, the data show that prominent prior periods of similar “overvaluation” happened many decades ago: once prior to the Great Depression and again prior to the dot-com bubble. The Great Depression market selloff certainly was not caused by a richly valued stock market, though the market’s valuation probably reflected factors that did contribute to the Great Depression. The dot-com bubble was caused by overvaluation, but the current state of tech valuations is nowhere near as extreme as in 1999. The market may yet experience a period of poor returns or a large selloff, but the likeliest underlying cause will be something other than the currently high CAPE ratio. More in this piece: https://lnkd.in/e8bcezvR

In this piece, we take a look back at our business now that we've hit our three year anniversary. We review our performance, talk about just how cheap "free" model portfolios are, and discuss a few pitfalls to avoid in client portfolios. (And we also discuss the Trump trades from November!) https://lnkd.in/gu-Z-2cK

Richard Bernstein has an interesting piece (https://lnkd.in/eWGAFife) in Advisor Perspectives from a few weeks ago. He argues that "[c]ries that the United States is about to fall into a financial apocalyptic abyss seem greatly overdone." I agree. Two plots from his analysis (reproduced below) tell the story. The U.S. debt to GDP ratio is certainly uncomfortably high. But the U.S. level of interest payments to GDP is not particularly worrying (at least for now). We had a similar message a few months back, which you can read about here: https://lnkd.in/ee6MhuQS.

QuantStreet's November update is out. We discuss our thoughts on why October saw a large dollar/gold/bitcoin rally (and a large outperformance of U.S. vs international stocks) and on what this means for investor views about market tail risk. We also talk about our new large selloff forecasting model and its relatively benign current outlook. https://lnkd.in/gGs8yDXv