The +36 VIX US Equity Rally – What Now?

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The +36 VIX US Equity Rally – What Now?

Three “Data” items today:

Topic #1: The bounce in US large caps since the +36 CBOE VIX Index close on March 7th (36.5, to be exact). There are 3 VIX levels where we recommend adding to US equity positions: 36, 44 and 52. These are, respectively, 2, 3 and 4 standard deviations (8 points) from the long run mean (20).

History shows that these are good entry points for investors with a 1-year holding period or longer. Since 1990, the S&P 500 has been higher a year later after a +36 VIX close in 96 percent of the times when the “fear gauge” reached those levels.

Over shorter timeframes, such as in the first month after a +36 VIX close, the historical data looks like this:

  • One-month average S&P 500 return: +2.5 percent
  • Best and worst 1-month returns since 1990: +25.1 pct, -20.3 pct
  • Percent of times returns positive: 204 of 301 instances (66 pct)

Since March 7th, the S&P 500 is up 6.2 percent. Three thoughts on that:

  • Good news: the VIX indicator worked, spotting a near term low for US large caps almost to the day (the S&P bottomed on March 8th).
  • Bad news (1): we are now well above the average returns for a post +36 VIX close (that +2.5 pct average noted above) and closing in on the average 3-month returns for this signal (+7.2 pct).
  • Bad news (2): the positive return success rate over 1 month for the +36 VIX close indicator is only 66 percent, and we still have almost 3 trading weeks ahead of us before the month window closes.

Takeaway: the rally off the lows from earlier this month, while welcomed, is already well ahead of the average bounce from a +36 VIX close back to 1990. How long it can continue in the face of that statistical reality comes down to 2 factors. The first is Q1 corporate earnings, which we will discuss in the next point. The second is a macro catch-all of concerns ranging from the Russia-Ukraine conflict to oil prices and interest rates. As much as we are heartened that US large caps did what they “should” do after a +36 VIX print, we remain cautious near term.

Topic #2: The latest color on Wall Street analysts’ estimates for Q1/Q2 S&P 500 corporate earnings. We are watching these closely as we come into the last 2 weeks of the first quarter. Analysts certainly have all the excuses they might need to reduce estimates across most of the companies of the S&P 500 (excluding Energy, of course). We’re also mindful that the tail end of a calendar quarter is “earnings warning season”, when companies publicly warn investors if they are likely to miss Street expectations.

On the plus side, earnings estimates are edging higher again after wobbling for the last few weeks, according to FactSet’s weekly Earnings Insight report (link below):

  • Most recent (week of March 18th): Q1 $51.91/share, Q2 $55.84/share
  • March 11th: Q1 $51.79, Q2 $55.59
  • March 4th: Q1 $51.64, Q2 55.54
  • February 25th: $51.64, Q2 $55.39
  • February 18th: Q1 $51.86, Q2 $55.44
  • Q1 2022 estimates are up +0.5 percent versus 3 weeks ago and are also higher than those of a month ago.
  • Q2 2022 estimates are up +0.8 percent versus 3 weeks ago and are higher than those of a month ago.

It is, however, still concerning that Wall Street analysts see Q1 2022 S&P earnings power ($51.91/share) well below Q4 2021 actual results ($55.37/share). Putting those numbers in context:

  • For the S&P to match Q4’s actual results, the index would have to earn +6.7 percent more than current Street estimates.
  • Last quarter, the companies of the S&P beat Street estimates by +7.8 percent. Good news, that, but this was still less than the 5-year average beat rate of +8.6 percent.

Takeaway: with no scheduled Fed meeting until May 4th, Q1 earnings season has a chance to shift investor attention away from macro issues and back to fundamentals. These should, in our opinion, remain strong and we do expect the S&P 500 to print another $55/share in aggregate earnings this quarter. Here’s the thing, however: that quarterly estimate annualizes to $220/share and the S&P trades for almost exactly 20x that estimate today. That’s a (very) healthy multiple in a (very) uncertain macro environment.

Topic #3: This year’s US individual tax refund season continues to outperform 2021 by a surprisingly wide margin. We monitor these payments regularly, because refunds are the largest lump-sum payments many American households see in a given year. Therefore, they can (and often do) influence consumer confidence and spending. The latest data (link to IRS data below):

  • Through the week of March 11th, 6.6 percent more US households have received a refund check than last year at the same time. This is primarily due to the IRS processing 5.9 percent more returns than in 2021-to-date, when it was capacity constrained by workforce issues related to the pandemic.
  • The average refund size is $3,352, up 13 percent from last year.
  • Total refund payments to-date are $152 billion, up $26 billion (+21 percent) from last year. (Note: $28 billion is $78/person for every American, regardless of age.)

Takeaway: refund checks are buffering US household budgets from inflationary pressures. This can last for a few months longer since refund checks are both meaningful to the average American household budget and noticeably larger than last year. Past June – July, however, this money will be likely be spent or allocated to other uses (usually debt paydown and savings). After that, inflation will be much more noticeable for many consumers.


FactSet Earnings Insight report:

IRS Data: