Quick Market update - Feb 2023

One Key to successful Investing is understanding Human Behavior. Economic and macro conditions affecting the market are constantly changing, but how we react to those changes remains most important. Accurately predicting how macro conditions will impact the market is nearly impossible to do successfully on a year-in and year-out basis. However, recognizing consistent behavioral patterns creates tremendous investment opportunities for those who have the emotional intelligence to capitalize on them.

The behavior since the market low in October has been textbook. In my opinion, are currently in the process of traveling the four stages of a bull market as described by Sir John Templeton: born on pessimism, grown on skepticism, mature on optimism, and dying on euphoria. Some may argue that this is overly simplistic, but I believe it to be a valuable framework for understanding the market.

The beginning of 2023 saw Wall Street's strategists, economists, and investors all entrenched in a pessimistic view of the market. However, as the year has progressed, we have seen some signs of progress. Wall Street strategists have started to lift their price targets, but most remain convinced that the current rally is merely a bear market rally. Economists have also changed their view, as expectations of a 2023 recession have decreased significantly. Investor sentiment has turned more bullish in recent weeks, with bullish sentiment reaching its highest level since December 2021. However, global allocators are still underweight equities, and there are no signs of reallocation yet.

Some tell-tale signs can help investors understand the stage of the market they are in, including Wall Street's strategists' opinions, economists' predictions, investor sentiment, and global allocators' choices. Currently, we are still in the pessimistic stage and will soon entering the skepticism stage.

Even though the market is strong year-to-date, the media still gives more credence to disbelieving bears than bulls. Investors are apprehensive, which is a sign of skepticism. The pains of losing money are still so raw that investors are considering a 4.5% a risk-free investment. However, in the later stages of a bull market, 4.5% feels underwhelming..... considering Bull Markets tend to return almost 20% annualized... 20% > 4.5%....

Finally, it is worth noting that the presidential cycle has historically been a powerful force in the market. The first quarter of a pre-election year has historically been the best quarter, and Q2 has been excellent as well. Additionally, since 1942, the market has always been up from the mid-term elections over the next 12 months. The US economy has never had a recession in the 3rd year of a presidential term. These historical patterns are not foolproof, but they are certainly worth keeping in mind as we navigate the market.

Thanks for reading!

Mate Svorinic