This week: technicals, sentiment, flows, market cycles, stockmarket stats, (smaller)Big tech, global vs US equities, and a new bull market signal for global equities...
Remember that flow into global equities is primarily driven by investors seeking to capture currency return as the dollar weakens. Global investors have made a ton of money in recent years capturing the translation gains of a strong dollar. I ran a global fund in the 80’s and 90’s and currency was a huge factor in cash flows in to the fund. Most American investors are quite clueless about the impact of currency on earnings and most companies do not disclose much about their hedging strategies.
100%, ideally I would want to see a good relative value story, and maybe something around the macro/fundamentals e.g. sector skews, relative earnings cycles etc, and ideally for the technicals to confirm...... but at the end of the day, FX is a (the?) critical piece of the puzzle.
And yes, agree, many US based investors miss the FX aspect -- but who can blame them when home bias has worked so efficiently the past decade!
DIA is only ~7% off it's Covid sugar high so it looks you can't fool (or whatever the heck is happening) all the people all the time about multi-national's sources of earnings.
yeah and I guess there is still the crowd that claim because many large caps have global earnings that you don't need to buy global equities because you already get (some) exposure through US equities (a relatively non-compelling argument if you ask me)
Like the earnings chart a lot. Exhibit 3. Why are my eyes attracted to the VERTICAL GREY lines showing further significant earnings deterioration DURING recession whereas ‘23 we’ve yet to see any VERTICAL GREY line😳😂…even a mild one into ‘24 takes S&P EPS < $180 not what analysts pencil in w/ co. approval @ $230🤷🏻
Putting it all together, from both a fundamental and technical perspective, I see the following:
US stock indexes appear to be headed lower over the course of 2023 and maybe into 2024; this is in accordance with the charts, the labor market, and the Fed themselves basically telling us this is what they want.
At some point in the year, on the back of what will eventually be a slightly more dovish Fed (maybe not lower rates, but a less-hawkish tone at least) and a potential washout of bullish sentiment, both stocks and commodities may begin a very strong multi-month cyclical bull market rally.
We have seen the first year of what is likely to be a multi-year secular bear market, likely to be characterized by wild swings in both directions, creating a lot of opportunity for the active investor.
The best portfolio for this sort of environment is likely comprised of high quality dividend-paying value stocks, select emerging market ETFs, US equity index shorts, and a substantial amount of cash or short duration cash equivalents.
Very nice chart series. I expect the S&P 500 to finally break above the downtrend line because the negative print on CPI will cause shorts to cover and the underinvested to start buying again. The negative sentiment indicators support this scenario. Keep up the good work.
yeah you have to be careful the grand narratives -- more often those sort of stories are driven by price vs driving price. I remember back in 07/08 hearing about "mega trends" and "structural themes" with regards to the rise of EM and commodities (which was basically about the top in the market!)
Remember that flow into global equities is primarily driven by investors seeking to capture currency return as the dollar weakens. Global investors have made a ton of money in recent years capturing the translation gains of a strong dollar. I ran a global fund in the 80’s and 90’s and currency was a huge factor in cash flows in to the fund. Most American investors are quite clueless about the impact of currency on earnings and most companies do not disclose much about their hedging strategies.
100%, ideally I would want to see a good relative value story, and maybe something around the macro/fundamentals e.g. sector skews, relative earnings cycles etc, and ideally for the technicals to confirm...... but at the end of the day, FX is a (the?) critical piece of the puzzle.
And yes, agree, many US based investors miss the FX aspect -- but who can blame them when home bias has worked so efficiently the past decade!
DIA is only ~7% off it's Covid sugar high so it looks you can't fool (or whatever the heck is happening) all the people all the time about multi-national's sources of earnings.
yeah and I guess there is still the crowd that claim because many large caps have global earnings that you don't need to buy global equities because you already get (some) exposure through US equities (a relatively non-compelling argument if you ask me)
Like the earnings chart a lot. Exhibit 3. Why are my eyes attracted to the VERTICAL GREY lines showing further significant earnings deterioration DURING recession whereas ‘23 we’ve yet to see any VERTICAL GREY line😳😂…even a mild one into ‘24 takes S&P EPS < $180 not what analysts pencil in w/ co. approval @ $230🤷🏻
Yep. I look at 18 different leading indicators, they all agree on one thing: vertical grey line is coming!
Impacts for investors:
https://open.substack.com/pub/finiche/p/off-to-the-races?r=1s05vd&utm_medium=ios&utm_campaign=post
Putting it all together, from both a fundamental and technical perspective, I see the following:
US stock indexes appear to be headed lower over the course of 2023 and maybe into 2024; this is in accordance with the charts, the labor market, and the Fed themselves basically telling us this is what they want.
At some point in the year, on the back of what will eventually be a slightly more dovish Fed (maybe not lower rates, but a less-hawkish tone at least) and a potential washout of bullish sentiment, both stocks and commodities may begin a very strong multi-month cyclical bull market rally.
We have seen the first year of what is likely to be a multi-year secular bear market, likely to be characterized by wild swings in both directions, creating a lot of opportunity for the active investor.
The best portfolio for this sort of environment is likely comprised of high quality dividend-paying value stocks, select emerging market ETFs, US equity index shorts, and a substantial amount of cash or short duration cash equivalents.
Thanks I would agree with much of your market outlook comments there, and likely the devil will be in the detail of the allocations/implementation...
Thank you for the comment. I share my entire portfolio on the first of each month if you want to see the detail.
Very nice chart series. I expect the S&P 500 to finally break above the downtrend line because the negative print on CPI will cause shorts to cover and the underinvested to start buying again. The negative sentiment indicators support this scenario. Keep up the good work.
Thanks, will do!
Indeed, it does have a feel (sentiment & technicals) of a market that is looking for an excuse...
yeah you have to be careful the grand narratives -- more often those sort of stories are driven by price vs driving price. I remember back in 07/08 hearing about "mega trends" and "structural themes" with regards to the rise of EM and commodities (which was basically about the top in the market!)