[AndrewWoo]

It is important to remember that there is no magic to any particular starting level and some areas saw considerable pressure before last August. Comparing the retracement in assets to their fall from their peak levels (of the prior 3 years) leaves most of these conclusions in place, but yields a few additional observations:

Despite the substantial rally, most assets on average are only a little more than 1/3 of the way back to those peak levels.

Viewed on this metric, the recovery in consumer-related equities looks much less exceptional. This reflects the fact that these areas saw substantial under-performance well before last summer.

By the same token, despite the enormous rallies this year, China A-shares are less than 40% of the way back to their prior peaks (and H-shares not much more). While this says nothing about the sustainability of those prior levels, it is a reminder that some of the rebounds we have seen have come off the backdrop of equally stunning declines.

The two areas that have retraced the least are – interestingly – oil (and related to that, energy equities) and the USD/JPY, both popular longs. In the case of oil, this partly reflects the magnitude of the declines, but also perhaps the overhang of inventories that the Commodity strategists have pointed to. Market analysts think oil markets will tighten further and expect oil prices to rise significantly
over the next 12 months, but so far exposure to metals has been more rewarding in related assets.

Some also think that USD/JPY belongs higher on the basis of valuation, the BBOP and financial conditions and it is less than 20% back towards its recent peak levels. But the fact that cross-JPY rates have retraced substantially further (around 40-50% in general of the prior damage), also provides an indication that part of the story is that the USD, now a key funding currency given zero rates, may be a somewhat different animal now and that the split between the G3and other currencies may be easier to rationalize than within the G3 itself.

US stocks are if anything behind, not ahead

We often draw the distinction, as we have above, between cyclical and risky assets. While that distinction is subtle (and hard to make neatly), we think it is important. That has been particularly true recently, since we think financial system risk has returned to pre-Lehman levels, while the cyclical picture – while better – quite clearly has not.

Alongside the broad exercise above, we often look within some of the key cyclical and risky assets specifically for a sense of which of a smaller group of more closely-related assets are behind or ahead. On the cyclical side, comparing the most reliably cyclical major FX cross (EUR/AUD), commodity (copper), equity implementation and interest rate (US 10-year yield), historic relationships suggest that this group of assets. The clearest message though is that cyclical equities still look to be ‘behind’ in this process, based on other assets. In terms of a set of key well-correlated risky assets from different markets, comparing HY CDX, SPX, AUD/JPY, EEM, a similar story emerges, with recent relationships suggesting that if there is a laggard here it is the US equity market.

While these exercises should not be taken overly seriously, they suggest that those who worry that the rally in US stocks has been excessive should be aware that if anything it is running behind related assets in other markets (with some other developed markets like the Nikkei lagging even further).