A Wall Street expert who recently fled the stock market says these 3 signals need to flash before he gets back in
- Vincent Deluard, a macro strategist at INTL FCStone, made a very prescient call when he forecasted the most recent equity sell-off right before it happened.
- While his foresight was rewarded, Deluard now faces the difficult task of figuring out when to re-enter the stock market - and outlines three signals that need to flash before he considers it.
Vincent Deluard nailed his latest stock market call.
After growing increasingly wary of the slow-motion trainwreck developing in the Treasury market - which he warned was headed for a liquidity squeeze - the INTL FCStone macro strategist pulled out of equities.
He'd been thinking about it for a while. Just a couple weeks prior, he warned that a "perfect storm" of bearish factors could send stocks tumbling. His exit was just an inevitable culmination of cautious sentiment.
Sounds great, right? Because of his prescient actions, Deluard avoided the brief meltdown that rocked stocks and wiped out 7% over a six-day period.
Not quite, says Deluard, who sees getting out as just half the battle. Now he has to figure out when to get back in. After all, who wants to miss the next leg up in history's longest-ever bull market?
And figuring out when to re-enter is easier said than done. The bearish conditions that drove the most recent stock sell-off haven't just vanished, even if investor nerves seemed to have calmed somewhat.
The way Deluard sees it, three distinct things have to happen for him to dip his toes back into equities. They are as follows:
1) A sustained rally in Treasuries
As Deluard points out, the "entire edifice of modern portfolio theory and the essence of asset allocation rests upon the axiom that stock market risk can be diversified with long-term Treasuries."
Which is why it was so troubling when stocks and bonds sold off simultaneously last week. And to complicate matters further, it was spiking yields - which reflect declining bond prices - that helped stoke so much anxiety in the equity market.
Simply put, it's going to take a rebound in Treasury prices - and the associated decline in yields - to get Deluard to consider getting back into stocks.
2) Contagion doesn't spread to the high-yield bond market
US companies are carrying a heavy debt load. That's common knowledge. And while some doomsayers expect an eventual reckoning, Deluard thinks spiking yields can be quarantined to Treasury.
But if they're not, then all bets could be off - and he definitely won't be getting back into stocks.
"A sudden removal of liquidity in the high yield market could turn an otherwise benign increase in Treasury
yields into an economic nightmare as junk borrowers would no longer be able to finance their operations," explains Deluard.
3) A de-escalation of the trade war
Corporate profit growth is at the center of Deluard's trade war argument. He says that if President Donald Trump doesn't dial back the conflict, it will have a detrimental effect on margins.
"With a higher cost of labor, capital, and raw materials, margins can only increase if the cost of goods sold drops," he said. "Analysts' forecasts therefore assume that there will not be any new tariffs in the next two years."
In order to keep more tariffs from hitting, a de-escalation will be necessary. And only then will Deluard consider edging his way back into equities.