UBS: US Equities Q&A - Goldilocks Triumphant

The confluence of an economy that looks poised to grow in 2017 at the Fed's 2.1% estimate (UBSe 2.2%) bolstered by a 2Q tracking near 4% while yields remain low, employment strong and energy prices anchored within a range around $50/bbl. have created ideal conditions for consumers and businesses alike, resulting in all-time highs in the S&P 500 and all-time lows in market volatility (Figure 1).

Sell (Vol) in May and Go Away?

No. Volatility, VIX, by its very nature is mean reverting, with a long run average of around 19. While we cannot know the timing and the nature of the next period of higher volatility, historically inexpensive option prices make attractive limited risk/theoretically unlimited reward stock replacement strategies as well as portfolio hedges to protect against the 5-10% corrections which have occurred regularly over the past three years.

Tech–Party Like It's 1999?

For now. Technology continues to be an overweight UBS Strategy sector whose valuation is not yet near prior extremes on an absolute or a relative basis. Nevertheless, such concentrated outperformance by a handful of stocks amid signs of crowded positioning is cause for concern coming into a time of year where reduced liquidity has exerted pressure on "consensus trades."

What is the "Sum of No Fears"?

Can the economy, earnings and markets remain not too hot, not too cold, but just right? What are the current concerns which, typically overcome, have propelled stocks higher these past eight years? Valuations, market "internals," surprises, and the shape of the yield curve figure prominently in a list of investor preoccupations.

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