Weekly market insights

Institutional opinions

1. Volatility to Persist: volatility is a constant in the new regime. Given the current economic conditions, characterized by factors such as rising interest rates, fiscal challenges, and geopolitical uncertainties, it suggests that market volatility is likely to persist.
2. Neutral Stance on Long-Term U.S. Treasuries: The analysis indicates a neutral long-term stance on U.S. Treasuries, with the rationale being that risks are more balanced after a period of rising yields. The prediction is that the trajectory of long-term Treasury yields could swing in either direction in the volatile environment.
3. Concerns about U.S. Economic Growth: The view is that the U.S. economy is on a weak growth path, and this perception is based on recent data and the expectation that higher interest rates are affecting business activity.
4. Inflation Expectations: The analysis acknowledges a recent drop in long-term U.S. Treasury yields following news of slower-than-expected U.S. inflation. However, it also suggests that the market may be missing the bigger picture, anticipating that inflation could resume amid slowing labor force growth and geopolitical shocks.
5. Interest Rate and Fiscal Policy: There is an expectation that the Federal Reserve might be at the end of its rate hike cycle, but looser fiscal policy and slowing labor force growth could compel the Fed to keep rates high for an extended period. The anticipation is that long-term yields may eventually resume an upward trend.
6. Fiscal Challenges and Bond Issuance: The analysis points to U.S. fiscal challenges contributing to volatility, particularly in the context of increased government spending and high debt issuance. Higher interest rates are seen as adding to the debt burden, and challenges in absorbing bond supply are highlighted.
7. Selective and Dynamic Investment Strategies: The outlook suggests a shift toward selective and dynamic investment strategies, with an emphasis on adapting portfolios to higher interest rates and considering structural shifts such as geopolitical fragmentation and demographic divergence. The expectation is for wider dispersion of security returns, indicating opportunities for above-benchmark returns.
8. Macroeconomic Factors Affecting Investment Themes: The analysis identifies key macroeconomic factors influencing investment themes, including the ongoing impact of pandemic-induced shifts in consumer spending, the worker shortage, and the expectation of "full-employment stagnation." The overall backdrop is described as less favorable for broad asset class returns.
9. Timing of Fed Rate Cuts: The macro take suggests that U.S. inflation has cooled, but the Federal Reserve is unlikely to cut rates soon. Rate cuts are anticipated later, possibly in the second half of 2024, contingent on the progress of core inflation falling towards the Fed's 2% target.
10. Investment Themes: The outlined investment themes include a focus on income (overweight on short-dated U.S. Treasuries), seeking opportunities in a more granular and diversified manner, and recognizing the impact of mega forces such as digital disruption (overweight on AI investments).
11. Post-Thanksgiving Market Trends: Historically, the stock market tends to perform well post-Thanksgiving, with an average December return of about 1% over the last 30 years. Positive gains after the holiday, observed three-quarters of the time, often set the tone for the following year, with a positive return 77% of the time and an average return of 11%. The current year-to-date gain of over 20% going into Thanksgiving suggests an average return of 17% in the following year, highlighting a positive momentum as we enter the holiday season.
12. Recipe for Sustaining the Market Rally: The market rally is supported by key ingredients, including ongoing moderation in inflation, a Federal Reserve on hold with rate hikes, and a gradual cooling in economic growth. Lower inflation has driven Treasury bond yields lower, providing a catalyst for market gains. The market anticipates the Fed staying on hold until core inflation approaches 2.0%, after which a gradual reduction in interest rates may be signaled. A gradual economic slowdown is viewed as a positive seasoning for the rally, helping contain inflation and keeping the Fed on the sidelines.
13. Underperforming Small-Caps in 2023: 2023 has been challenging for small-cap stocks, with the Russell 2000 trailing the S&P 500 by about 15%. Economic concerns and high interest rates have contributed to this underperformance. However, there's optimism that as the headwind of rising yields subsides, small-caps could play catch-up, especially during the historically strong four-month stretch between November and February, presenting a potential comeback story for small-cap stocks in the coming year.
14. Weight Check on S&P 500 Sectors: The S&P 500 has shown narrow leadership, with a few large companies driving significant gains. The top three sectors now comprise over 50% of the index, raising questions about the value of diversification. While acknowledging the strong outlook for these large companies, the commentary emphasizes the importance of building well-diversified portfolios to spread out risk, as market sentiment can change rapidly.
15. Bond Market Performance: Bond market performance has faced challenges with rising interest rates over the past three years, leading to declines in bond prices. Recently, however, interest rates have retreated on signs of moderating inflation and economic growth. U.S. investment-grade bonds are up about 1% from a year ago, and even with their recent decline, interest rates remain at their highest in over a decade. The commentary suggests potential adjustments to bond allocations, such as considering diverse bond allocations, enhancing quality, and potentially lengthening duration to manage interest rate risk in a moderating economic environment.
16. Macro Strategy—Progress On The Inflation Front Likely To Continue: The U.S. economic data suggests a positive trajectory, with strong growth expectations for 2023 and 2024. Increased nominal GDP, driven by robust consumer spending and government expenditures, has surpassed expectations, contributing to a positive outlook for corporate earnings. Higher labor force participation rates for women, facilitated by remote work, and increased productivity have helped mitigate inflationary pressures. The likelihood of additional Federal Reserve interest rate hikes has diminished, providing a favorable backdrop for risk assets.
17. Portfolio Considerations Amid Inflation Progress: In light of the expected softening in nominal GDP growth and ongoing disinflation trends, a balanced portfolio approach is recommended. Adjustments to a softer growth environment involve a risk-neutral stance across asset classes. The strategy suggests maintaining a fully invested position, utilizing Fixed Income for cash flow, Equities for long-term growth, and Alternatives for diverse portfolio considerations. A slightly long-duration position is recommended to capitalize on higher nominal and real yields, serving as a prudent measure against macro risks in the Equity portion of a diversified portfolio.
18. Asia Opportunity Amid China’s Challenges: Despite China's underperformance in 2023, other Asian markets present opportunities within emerging markets. North Asian markets like Korea and Taiwan, driven by technology and semiconductor sectors, have outperformed. Southeast Asia, India, and Japan are identified as regions likely to gain market share from China. Factors such as growth in the global digital economy, green transition support, internal reforms, and manufacturing supply chain shifts contribute to the positive outlook for these Asian markets.
19. Taking Stock of America’s Energy Security: The U.S. has solidified its position as a global energy leader, transitioning from a net energy importer to an exporter. This energy security provides a competitive advantage over other major economies like the European Union and China, reducing vulnerability to oil price shocks. Despite geopolitical uncertainties, the U.S. economy has thrived, outperforming others. The energy sector remains attractive for investment, with ongoing tensions in the Middle East, tight global supply, and strong energy demand supporting the sector.
20. Inflation Progress and Employment Trends: The U.S. economic performance, marked by strong consumer demand, government spending, and corporate earnings, has contributed to favorable employment conditions. However, signs of a cooling labor market are emerging, indicated by contractionary trends in manufacturing employment and a decline in planned payroll increases. The surge in labor force participation for women has eased wage and inflation pressures. Favorable productivity growth and disinflation trends, supported by a contracting money supply, suggest a potential return to lower inflation, with implications for business pricing power and profits in 2024.
21. Private Capital Performance: Private debt, particularly the senior-debt-oriented direct lending strategy, is likely to continue its strong performance. Direct lending may face challenges within the lowest quality segment of borrowers due to the elevated interest rate environment. Infrastructure and natural resources within real assets are expected to continue performing well, given their necessity-based demand. Private real estate may continue to face challenges due to the rising interest rate environment and economic slowdown.
22. Private Equity: Private equity performance may continue to show moderated returns, influenced by slower earnings growth, rising interest rates, and soft exit conditions. Distressed credit strategy and defensive, high-quality areas such as infrastructure and secondaries are favored for future investments.
23. Equities: S&P 500 Index is expected to maintain steady earnings and price targets for 2024, with upside potential driven by P/E multiple expansion. Russell Mid Cap Index and Russell 2000 Index (small caps) may experience early-2024 weakness, followed by an earnings recovery later in 2024. MSCI EAFE Index and MSCI Emerging Markets (EM) Index may face a choppy path with potential earnings and sentiment tests as the global economy weakens in early 2024.
24. Fixed Income - TIPS (Treasury Inflation-Protected Securities): Inflation is expected to trend lower in the near term as the economy weakens and then move higher later in the year during the economic recovery. Lower interest rates accompanying low inflation may lead to positive absolute performance, with long-term fixed income potentially outperforming TIPS.
25. Real Assets - Agriculture: U.S. corn production is expected to hit a record high, with technological advancements helping overcome adverse weather conditions. Despite challenges, the strong harvest has contributed to lower corn prices, falling nearly 32% year to date. The oversupply of major grains and oilseeds globally may result in softer prices, and the provided data suggests a neutral stance on agriculture while favoring a broad basket of commodities due to the ongoing commodity bull-super cycle.
26. Equity Market Outlook: The recent surge in the S&P 500 and Nasdaq is likely to experience a short-term pullback, but the overall trend for the S&P 500 remains intact, supported by the rising 4-year (200-week) moving average. The pullback in Q3 found support within the range of 4000-4200, maintaining the pattern of higher lows. A break above the January 2022 highs at S&P 4800 could signal the end of the 2022-2023 sideways trading range and the beginning of a new cycle. To change the optimistic outlook, monitoring the monthly momentum indicator for signs of slowing is crucial. Meaningful evidence of a negative turn in the longer-term underlying uptrend would require the S&P to break below the recent Q4 low and the support band between 4000-4200.
27. Intermediate-Term Equity Cycle: Focusing on the intermediate-term/multi-month cycle, both the S&P and Nasdaq are approaching important resistance levels at S&P 4637 and Nasdaq 14,446. The weekly momentum indicators suggest that pullbacks in this cycle are expected to be short-lived, with further upside anticipated into Q1. The short-term outlook for the S&P indicates that daily momentum is overbought and turning down, implying a pending pause or pullback. However, given the positive intermediate and long-term technical outlooks, pullbacks are expected to be short-lived, with support between 4401-4447.
28. Interest Rates: US 10-year bond yields are approaching important support levels between 4.24-4.33%, near the October 2022 highs. Short-term indicators suggest oversold conditions, and the expectation is for interest rates to bounce from near current levels. This is likely to coincide with a shallow pullback in equity markets. Resistance for bond yields begins at 4.5%, followed by 4.7-4.8%.
29. Gold Market: Gold is challenging important long-term resistance and has the potential to break out. Following a brief pullback from resistance between 2000-2075, gold is showing signs of pushing higher. A move above 2075 is anticipated, with the potential to reach 2358 and possibly higher. The technical strength of gold commodities is emphasized, and although gold equities are showing signs of rallying from oversold levels, the overall technical strength is considered stronger in gold commodities.
30. Equity Market: Equities, including the S&P 500 and Nasdaq, have surged impressively, rising 11% in just over three weeks, driven by economic data suggesting a potential end to the Fed's rate hike cycle and lower bond yields. However, concerns arise as stock participation in the advance is narrow, primarily led by Technology megacaps. The average stock is back to the midpoint of its 12-month sideways range, indicating a concentrated market leadership. While a short-term pullback is expected, the overall trend remains intact above the rising 4-year moving average. Rebuilding trends for sustainable upside may require a "cooling-off" period following recent gains.
31. Macro: US Economy: Recent data points to decreasing inflation and a slowing economy in the US. Leading economic indicators, consistent with recessions, raise caution about the economic outlook. Although the labor market remains solid, there are expectations of weakening in the coming months. Monitoring weekly jobless claims is crucial to assess employment trends. The Federal Reserve is unlikely to ease monetary policy soon, making sustainable upside for equities challenging. A cautious approach is advised, balancing portfolio exposures and focusing on quality, earnings strength, and positive price trends.
32. Q3 Earnings Season: Q3 2024 earnings season concludes with solid results, as 80% of companies beat EPS estimates. However, price reactions are subdued, especially with declining forward guidance for Q4. The US consumer is softening, shifting towards value, aligning with the broader macro view of decreasing inflation and economic softening. Notably, technology-oriented stocks justify their market leadership with continued earnings strength, while Consumer Discretionary expectations adjust. Utilities earnings hold up, supporting gains as bond yields stabilize.
33. Technical: S&P 500: Despite the recent encouraging rally with the S&P 500 up 11% in 18 days, stock participation has been less impressive, concentrating in Technology megacaps. The average stock returns to the midpoint of its 12-month range, and relative strength contracts. Rebuilding trends for sustainable upside require further technical work, and a potential "cooling-off" period is considered normal after recent gains.
34. High Yield CDS Spreads: Credit spreads remain contained despite rising economic concerns, supporting equities. An inverse correlation between High Yield CDS Spreads and the Equal-Weighted S&P 500 over the past two years is observed. A potential breakout in the relative strength of Equal-Weighted Consumer Discretionary vs Staples is seen as a positive indication for market momentum into year-end.
35. Technology Sector: Technology has dominated market performance, contributing significantly to the S&P 500's YTD return. The sector remains resilient with a YTD gain of +51%, outpacing the equal-weighted S&P 500. Despite recent market fluctuations, Technology retains its leadership. Semiconductors, often leading Tech trends, are approaching resistance, suggesting a potential consolidation of recent gains.
36. U.S. Market: Stocks closed higher in a quiet holiday-shortened trading week, with the S&P 500 and Nasdaq outperforming. NVIDIA's cautious guidance due to export restrictions to China impacted the Nasdaq, but growth stocks surpassed value stocks. Durable goods orders dropped 5.4%, mainly attributed to a decline in civilian aircraft orders. S&P Global's November business activity report indicated a services sector pickup compensating for manufacturing slowdown, but firms cut jobs for the first time since June 2020. A successful Treasury auction eased concerns, contributing to a drop in the 10-year Treasury yield. Despite light trading, investment-grade corporate bond spreads tightened, and high-yield bonds traded higher on solid equity performance.
37. Europe: The STOXX Europe 600 Index rose 0.91%, driven by hopes of central bank interest rate cuts in H1 2023. Major European indexes varied, with France's CAC 40 and Germany's DAX gaining, while Italy's FTSE MIB and the UK's FTSE 100 declined. European government bond yields edged higher, with Germany's 10-year yield climbing from a two-month low. The European Central Bank (ECB) dispelled rate cut expectations, emphasizing the ongoing fight against inflation. Eurozone business activity shrank for the sixth consecutive month in November, signaling a potential recession. The UK unveiled tax cuts, but the Office for Budget Responsibility halved growth forecasts for 2024 and 2025.
38. Japan: Japan's stock markets saw muted returns, with the Nikkei 225 gaining 0.1%, reaching its highest level since 1990. Strong domestic corporate earnings and expectations of stable U.S. interest rates supported sentiment. October's consumer inflation fueled speculation about the Bank of Japan's (BoJ) monetary policy. Although the BoJ allowed JGB yields to rise, it signaled waiting for stronger wage growth. Japan's core CPI rose 2.9%, exceeding the BoJ's 2% target. Speculation grows about the BoJ's monetary policy trajectory amid sustained inflation and potential actions in next year's spring wage negotiations.
39. China: Chinese stocks retreated as Beijing considered fresh stimulus for the property sector amid broader economic challenges. The Shanghai Composite and CSI 300 declined, while the Hang Seng Index gained. Regulators outlined a funding plan for property developers, emphasizing financial support to reduce defaults. Chinese banks kept loan prime rates unchanged, maintaining a looser monetary policy. Expectations of a 5% economic growth target for 2024 emerged. Property data showed a downturn, reflecting ongoing economic concerns. Reports suggest a potential reserve ratio cut by the People's Bank of China.
40. Other Key Markets (Hungary and Colombia): In Hungary, the National Bank cut its main policy rate, aligning with expectations, citing a decline in domestic inflation. Core inflation slowed, supporting the belief that inflation will continue to decrease. In Colombia, unexpected fiscal developments included a third-quarter economic contraction and discussions about dropping the fiscal rule to increase public investment. The Supreme Court struck down part of the 2022 tax reform, impacting oil companies' tax deductions and necessitating adjustments to the budget estimates.

Previous update:

Institutional Opinions:

1. Positive Outlook for 2024: The economic data suggests a balanced scenario, not too hot or too cold, contributing to stocks reaching a two-month high. The report emphasizes three reasons supporting a positive outlook in 2024.
2. Inflation Slowdown: Progress on inflation continues, with the core Consumer Price Index (CPI) reaching its lowest reading in two years. The report anticipates a good chance that policymakers might revise their inflation projections lower, potentially leading to a more dovish stance by the Federal Reserve and potential rate cuts in the second half of 2024.
3. Gentle Growth Slowdown: The growth rate is gently slowing, with signs of fatigue in household consumption and a cooling labor market. However, this slowdown is gradual and aligns with the Federal Reserve's efforts to lower inflation. While retail sales fell in October, the decline was less than expected, and overall growth remains solid.
4. Falling Yields and Change in Fed Policy: Falling yields in November confirm a change in the Federal Reserve's policy, as easing inflation pressures and a cooling labor market increase confidence that the Fed is likely done hiking rates. The report suggests that the peak for this rate-hiking cycle may have been reached, with potential rate cuts anticipated in the second half of 2024.
5. Market Leadership Shift: The recent market moves show a shift in leadership, with broadening participation beyond a small number of high-performing stocks. Small-caps and the equal-weight S&P 500 outperformed, indicating an opportunity for laggards to catch up. Bond proxies, small-caps, and value-style investments are highlighted as potential beneficiaries as the headwind of rising yields subsides.
6. Year-End Rally: The report suggests that the ingredients for a year-end rally are in place, driven by the right balance of economic data. While acknowledging that markets may not move in a straight line and could experience pauses, the overall tone is optimistic.
7. Opportunity for International Returns: In the scenario of a smooth cooling economy allowing the Fed to cut rates, the U.S. dollar could weaken, presenting an opportunity for international returns.
8. Fixed-Income Strategy: With a peak in rates, there is an opportunity to start extending duration on the fixed-income side, with bond returns likely to outperform cash in 2024.
9. Overweight AI Theme: AI is considered a mega force shaping the new investment regime, leading to an overweight position in the AI theme in developed market stocks. The buzz around AI is increasing, with tech shares outperforming, major players preparing to roll out new AI tools, and its implications going beyond pure technology companies.
10. AI's Structural Shifts: Advances in computing hardware and deep learning innovations have led to an inflection point for AI. The report sees an intelligence revolution on the horizon, with exponential growth in AI capabilities. The tech sector, particularly mega-cap tech names, has benefited, and a fundamental shift toward AI-centric business models is observed.
11. Technology "Stack" Evolution: The tech industry is experiencing a shift toward AI-centric business models, represented as a technology "stack." The layers include cloud infrastructure, chipmakers, models, data, and data infrastructure, with applications leveraging these innovations. AI-powered automation is expected to boost worker productivity, impacting companies, sectors, and economies.
12. AI's Impact on Economies and Markets: AI's impact is predicted to span multiple domains, intersecting with mega forces like aging populations and geopolitical competition. Companies are likely to succeed by attracting top talent and investing in scaling up computational power. AI patents are seen as indicators of potential pioneers and laggards, with a positive correlation between AI patents and earnings growth.
13. Adoption Limits and Risks: While AI has adoption limits and faces cybersecurity risks, opportunities for consultancies or startups specializing in secure AI environments are highlighted. Generative AI, despite reliability issues, is expected to improve in future versions. Global governments' efforts to address risks and shape AI business conduct are seen as opportunities.
14. AI's Interaction with Mega Forces: The report suggests that AI's interaction with other technologies and mega forces is likely to yield significant investment opportunities. A multi-country and multi-sector AI-centered investment cycle is anticipated to unfold, supporting revenues and margins. The report maintains an overweight position in the AI theme in developed market stocks on a six-to-12-month horizon.
15. Market Backdrop: U.S. stocks gained, with a focus on the rising importance of AI. Investors are demanding more compensation for the risk of holding long-term bonds due to yield volatility. U.S. Q3 corporate earnings show mega-cap stocks propping up earnings.
16. Investment Themes: The U.S. is navigating pandemic-induced shifts in consumer spending and a worker shortage. The report predicts "full-employment stagnation" and expects inflation to go on a rollercoaster ride, rising again in 2024. The investment implication is an overweight position in short-dated U.S. Treasuries. Increased volatility prompts a more granular approach, focusing on opportunities priced into the macro view. Dispersion within and across asset classes is expected to be higher, offering more ways to build portfolio breadth via uncorrelated exposures. Quality is favored in both equities and fixed income. Mega forces, including AI, are identified as structural changes poised to create shifts in profitability. The report emphasizes the importance of granularity in finding sectors and companies set to benefit from mega forces. AI is specifically highlighted as an overweight investment in a multi-country, multi-sector investment cycle.
17. Macro Strategy—Fixed Income: The Federal Reserve's recent expected pause in rate hikes has shifted market expectations, with potential risks of persistent inflation impacting the duration strategy. A cautious, slightly long-duration position is maintained, contingent on long rates approaching 5%, as the market navigates economic uncertainties and inflation concerns.
18. Market View—Elections 2024: The global political calendar for 2024, featuring over 40 national elections, carries significant implications for geopolitical dynamics and U.S. asset prices. The outcomes could shape global shifts in polarization, protectionism, and climate policies. Key points include monitoring U.S.-Sino tensions, resource protectionism, and election results in Taiwan, India, Indonesia, Mexico, and the European Commission.
19. Thought of the Week—The Lesson In The Latest Rally: The U.S. equity market's November rebound, driven by the Fed's decision and a potential end to its rate-hiking cycle, signals short-term relief. While a year-end rally is anticipated, longer-term choppiness is expected amid challenges such as slowing economic growth and geopolitical risks. The episode underscores the difficulty of market timing, emphasizing a balanced and diversified portfolio approach for long-term investors.
20. Market Update: Moody's Rating Change of U.S. Credit: Moody's change in the U.S. credit rating outlook to "negative" reflects concerns about fiscal deterioration and increased political polarization. Despite this, the U.S. remains an ultra-high-quality investment, maintaining its Aaa rating. The Chief Investment Office underscores confidence in U.S. Treasury debt as a secure and liquid investment.
21. Portfolio Considerations: A risk-neutral approach across asset classes is recommended, emphasizing a fully invested portfolio using Fixed Income for cash flow, Equities for growth, and Alternatives for diversification. The suggestion is to maintain a slightly long-duration position for potential advantages in yields and as a prudent response to macro risks in the Equity portion.
22. Investment-grade Credit—Stay Up-in-Quality and Wait for More Attractive Entry Point: Despite attractive yields, caution is advised in Investment-grade credit, with concerns that credit spreads may not reflect the risks of slowing growth in 2024. A suggestion is to lean toward high quality and stay slightly underweight in IG corporates, favoring more defensive assets amid expectations of positive but below-trend GDP growth.
23. MBS Forward Excess Return Could Improve on Wider Spreads and Easing of Interest Rate Volatility: The Mortgage-Backed Securities (MBS) sector, having underperformed, is anticipated to improve with factors such as the Fed concluding its hiking cycle, lower interest rate volatility, and more appealing MBS valuations. Potential support from U.S. banks and expectations of tighter spreads contribute to the positive outlook.
24. Munis More Attractive Based on Cheaper Valuations, Improving Technicals, and Stable Fundamentals: Municipal bonds are deemed more attractive due to cheaper valuations, improved technical conditions, and stable credit fundamentals. Anticipating improved technicals and increased investor demand once interest rate volatility stabilizes, munis are viewed as a stable investment with generally low default rates, even in potential recession scenarios.
25. Investment Implications—Politics and policies matter: The geopolitical landscape of 2024, marked by over 40 elections globally, presents both market volatility and opportunities. Key considerations include U.S.-Sino tensions, resource protectionism, investment landscapes in Taiwan, India, Indonesia, Mexico, and the European Commission, with a keen eye on U.S.-EU relations and their impact on industry regulation.
26. Lesson in the Latest Rally—Market Volatility Continues: Reflecting on the recent rebound in the U.S. equity market, driven by factors like the Fed's policy decisions and dovish interpretations, short-term relief is expected. Emphasizing the challenge of market timing, the lesson underscores the importance of a balanced and diversified portfolio approach amid continued market volatility and challenges stemming from economic growth slowdowns and geopolitical risks.
27. Gold's Central Driver—Supply and Demand Dynamics: Despite a challenging year for commodities, gold has outperformed, rising by 7.1% while the average commodity declined by 5.2%. This is remarkable considering the historical influence of rising real interest rates and a strong U.S. dollar, both of which have not hampered gold in 2023. The driving forces behind gold's resilience are identified as supply and demand dynamics. Weak supply growth, a consequence of the commodity bear super cycle from 2011 to 2020, combined with increasing demand, particularly from central banks concerned about global debt levels, has bolstered gold. The prediction is that gold will continue to thrive into 2024, with a year-end target range of $2100 to $2200 per ounce, fueled by sustained demand outpacing supply and potential macroeconomic tailwinds.
28. Equities—Volatility Creates Opportunities: The equity market has experienced significant volatility, with the S&P 500 Index fluctuating between 4373 and 4104 in a matter of weeks. Despite this, the prediction is that markets will remain range-bound, influenced by factors such as long-term interest rates, geopolitical tensions, and a dimming economic outlook. While the risk-reward balance is seen as mildly unfavorable at current levels, recent market lows presented solid returns, around 14.5% at 4104. The suggestion is for long-term investors to remain disciplined in executing their plans, focusing on U.S. Large Cap Equities, particularly in the Industrials, Materials, and Health Care sectors. The year-end target range for 2023 is set at 4000–4200, acknowledging the potential for economic slowdown impacting corporate profits.
29. Fixed Income—Asymmetrical Returns in Long-Term Treasuries: With the 10-year U.S. Treasury approaching a 5% yield, investors are advised to assess the potential upside and downside returns of their bond holdings. The focus is on asymmetrical returns, with the table illustrating the impact of interest rate movements on short-, intermediate-, and long-term Treasuries. Notably, longer-duration bonds exhibit greater asymmetry in price returns. The recommendation is to consider long-term Treasuries, given their potential risk hedge amid anticipated increased equity volatility and rising bond prices as the economy weakens. The current starting yields are viewed as providing a cushion against potential price declines.
30. Alternatives—M&A Environment and Merger Arbitrage: Merger and acquisition (M&A) activity remains below long-term trends but has stabilized, with quarterly volumes ranging near $800–$900 billion. The average premium of announced deals has widened, reaching approximately 46% in the third quarter, reflecting uncertainty about deals reaching the closing stage. Regulatory scrutiny and concerns about inflationary pressures continue to impact the M&A outlook. Despite stabilization, an unfavorable guidance is maintained on Merger Arbitrage strategies, citing lower deal activity, higher interest rates, and heightened geopolitical risks. Patience is advised for a more opportune entry point as the economy shows signs of recovery.
31. Equity Outlook—Q1 2024 Upside Expected: Equity markets have displayed volatility throughout the year, witnessing a strong rebound in 1H 2023, a Q3 pullback into Q4, followed by a recent surge in November. The historical perspective, illustrated by the S&P 500 chart from 1950 to today, emphasizes multi-year cycle lows occurring approximately every 3-4 years. Despite irregularities in cycles, such as the outliers in 1987 and 2007, the pattern suggests recurring trends influenced by central bank actions impacting interest rates, economic growth, and corporate earnings. Currently, with the cycle lows likely established in 2022, the S&P remains in a broad trading range between 3500-4800. The expectation is a new upcycle confirmation with a breakout to new highs in Q1 2024.
32. S&P Intermediate-Term—Short-Lived Pullbacks Anticipated: Examining the weekly chart, the Q3 decline aligns with a seasonal pullback, positioning weekly indicators from overbought to oversold levels moving into Q4. While a pause is expected near the red resistance band between 4510-4637, further upside is anticipated into Q1. Weekly indicators are projected to peak and signal another pending pullback.
33. S&P Short-Term—Positive Momentum Amidst Potential Pullback: The S&P's surge to the resistance band between 4527-4567, coupled with overbought short-term momentum indicators, suggests an imminent pullback. However, given the positive intermediate-term view, pullbacks are likely to be short-lived, with continued upside expected well into Q1, supported between 4401-4447.
34. US 10-Year Yields—Short-Term Bounce with Resistance: The weekly chart of US 10-year yields, previously near a multi-month peak at 5%, is poised for a pullback. The daily chart indicates short-term oversold conditions, hinting at a pending bounce from support near the blue uptrend line. Anticipated resistance in the 4.7-4.8% range suggests a short-lived bounce before potential further decline.
35. Smaller-Cap Equity Update—Encouraging Signs of Improvement: The Value Line Geometric index and Russell 2000 Small-cap index, while lagging behind the larger cap S&P 500 in 2023, show signs of bottoming near Q4 2022 lows. Although a rally through 2023 highs is required to signal new bull cycles, the recent improvement is viewed positively. Weak and oversold sectors like financials, utilities, healthcare, consumer discretionary, and staples are beginning to bottom as interest rates peak and recede, providing an encouraging development for these indices.
36. UK Economic Scenario—Stagflation Risks and Political Dynamics: The UK economy is facing stagnation, with Q3 GDP remaining flat, and 2023 showing minimal growth. The Conservative government, struggling in the polls, may attempt targeted tax cuts to revive the economy, potentially worsening inflation. Despite a weak macro backdrop, RBC BlueBay suggests a high risk of stagflation—a state of low economic growth, high inflation, and rising unemployment. If the Labour Party, currently leading in polls, gains power, it aims for a closer EU relationship and a shift to the center, offering limited negative impact on financial markets. RBC BlueBay recommends a cautious approach to UK equities but acknowledges opportunities in globally diverse, high-quality businesses. UK fixed income, with elevated yields, is seen favorably for UK-based investors.
37. US Equity Landscape—Fed Policy and Inflation Trends: US equities surged as investors speculated the Federal Reserve's rate hiking cycle is over, with the Nasdaq Composite outperforming. October's lower-than-expected inflation rates led to the belief that the Fed might halt rate hikes. The CME FedWatch tool indicates a potential rate cut by May 2024. The key question revolves around whether decreasing inflation aligns with economic slowdown or if the Fed's "soft landing" strategy succeeds.
38. Canada's Economic Landscape—Equity Sector Performance and Housing Market: The S&P/TSX Composite rebounded in November, led by Information Technology and influenced by declining bond yields. The Bank of Canada's rate hikes have cooled housing market activity, reversing the supply-demand dynamics seen earlier in 2023. Housing affordability concerns persist despite lower activity, and all eyes are on inflation data and potential BoC actions.
39. European Equities—Global Rally, Mining Stocks, and UK Inflation: European equities gained amid a global rally, particularly in rate-sensitive stocks. Mining stocks benefited from a weaker U.S. dollar and higher iron ore prices. UK CPI inflation softened, supporting the case for no change in the Bank of England's December meeting. RBC Economics sees limited further UK rate hikes, with the current 5.25% Bank Rate potentially being the peak.
40. Asia Pacific Markets—Xi-Biden Meeting and Tencent's Performance: Asia Pacific equity markets rose, led by the Hang Seng Index, as investors anticipated positive outcomes from the Xi-Biden meeting. Initial agreements between the two leaders suggest progress in bilateral relations. Tencent reported Q3 earnings surpassing expectations, with strong growth in video advertising on WeChat. Tencent plans to return cash to shareholders through buybacks despite already returning significant amounts.
41. Equity Markets and Economic Signals: The S&P 500 has seen a significant rebound, up 10% from recent lows on 10/27. The catalyst is economic data suggesting a potential end to the Fed's rate hike cycle, aligning with lower bond yields. October's CPI report showed core inflation rising 0.2% m/m, below estimates, indicating a fifth consecutive month of moderate inflation growth. If this pace continues, core CPI y/y could reach 2.6% by May and 2.4% by next year, aligning with the Fed's target range. PPI data further supports a downward trend in inflation.
42. Fed Expectations and Equity Technicals: Recent economic data suggests the Fed is in "wait and see" mode, with inflation moderating, labor markets normalizing, and consumer spending softening. While on hold, the Fed is cautious about the market front-running potential actions, as lower bond yields and surging stocks can be inflationary. The Fed remains committed to lowering and maintaining inflation, signaling a tough tone. Bond markets are pricing in an end to the rate hike cycle, with potential cuts in 2H 2024.
43. Breadth Thrust and Market Strength: Internal strength, noted two weeks ago from oversold conditions, has been encouraging, with breadth thrust reaching 10x advancers vs. decliners. This signals a potential end to the recent drawdown, though work remains as over half of stocks are below their 200 DMA. Economic volatility is rising, and the Fed may challenge sustainable market strength in its battle against inflation. Despite potential challenges, the market presents opportunities amid weakness.
44. Sustainable Rotation and Equal-Weighted Index Performance: A strong market advance occurred, producing the highest 1-day returns for the equal-weighted S&P 500 and Small Caps in over a year. Both had underperformed throughout the year but rallied to the midpoint of their range against the S&P 500. Sustainable rotation would require improved relative strength, especially after consistent underperformance since the March banking crisis. Resistance at the 200-day moving average is a crucial factor to watch.
45. S&P 500 Fundamentals and Earnings Outlook: Q3 earnings season is concluding with 92% of S&P 500 companies reporting. While results have been good, stock reactions have varied, with misses being punished more than beats have been rewarded. The market, in a drawdown during the reporting season, reflects a softening economic environment. Lagged effects of rapid Fed tightening are expected to weigh on economic activity, leading to weaker earnings. However, the market, being forward-looking, has likely discounted much of the negativity. The bear market, now over 22 months, presents an opportunity for multiple expansion and higher prices over the next 12 months, despite lower earnings. Using weakness as an opportunity is recommended.
46. U.S. Stock Market: The U.S. stock market, as indicated by the S&P 500 Index, has been performing well, reaching above the 4,500 barrier.The broad advance suggests overall positive sentiment, and the outperformance of the Russell 1000 Value Index indicates a preference for value stocks.Retailer results, such as Target's strong performance, may positively influence the market, but caution is advised as evidenced by Walmart's stock drop after lower guidance.
47. Inflation and Interest Rates in the U.S.: Inflation in the U.S. appears to be cooling, with the consumer price index remaining unchanged and core prices rising at a slower pace, potentially impacting retailer revenues positively.The decrease in inflation could be viewed positively for interest rates, as suggested by the drop in long-term Treasury yields to a two-month low of around 4.40%.Strong performance in U.S. investment-grade corporate bonds, high-yield bonds, and the leveraged loan market is linked to falling U.S. Treasury yields.
48. European Markets: European markets, including Germany's DAX, Italy's FTSE MIB, France's CAC 40, and the UK's FTSE 100, have seen gains. The STOXX Europe 600 Index ended higher.European Central Bank (ECB) leaders, including Christine Lagarde, hint at keeping interest rates higher for some time despite a decrease in the eurozone's annual inflation rate.
49. UK Economy: The UK experiences a slowdown in annual consumer price inflation to 4.6% in October, leading to increased bets on interest rate cuts next year.Despite the inflation slowdown, the labor market remains tight, with strong wage growth and unchanged unemployment rates.
50. Japan: Japan's stock markets have risen, supported by positive earnings surprises and the latest U.S. inflation data signaling a potential economic soft landing.The Bank of Japan (BoJ) is responsive to the weak yen's impact on imports and exports but asserts that there are both positive and negative aspects to currency fluctuations.Japan's third-quarter GDP contraction suggests a fragile economic recovery, with signs of easing inflation in October.
51. China: Chinese equities show mixed performance, with indicators highlighting the fragility of the country's economy. Property market data in China underscores a deepening slump, with declines in investment, sales, and new home prices.
52. Other Key Markets (Hungary and Czech Republic): In Hungary, a downside inflation surprise could lead to a dovish development, potentially paving the way for the central bank to continue reducing interest rates. In the Czech Republic, a temporary inflation impact is expected from administrative price changes, and the central bank might consider reducing interest rates in the next couple of months. Overall, the global economic outlook seems influenced by inflation trends, central bank policies, and market reactions to earnings reports.

Previous update:

Institutional opinions:

1. Consumer Spending Outlook: There are indications pointing towards a potential slowdown in consumer spending. Factors such as decreasing savings rates, rising credit card debt, and an increase in delinquencies suggest that consumers might be facing financial challenges, potentially leading to a moderation in spending.
2. Economic Growth Expectations: The recent data suggests that there might be a moderation in economic growth. Despite the economy's resilience, the mentioned factors could contribute to a slowdown in overall economic activity.
3. Inflation Trends: If consumer demand softens, companies may adjust to a slower demand environment, potentially resulting in lower inflation. This could have broader implications for the economy and impact the Federal Reserve's decisions on interest rates.
4. Market Dynamics and Opportunities: Anticipating a potential economic slowdown, there is a suggestion that markets could experience volatility. However, markets are viewed as forward-looking, and this volatility might present opportunities to diversify and add quality investments at potentially more favorable prices.
5. Federal Reserve's Stance: The recent data indicates that bank lending standards remain tight, and the Federal Reserve has been cautious in its approach. If the consumer slowdown persists, there is a suggestion that the Fed may not need to raise rates further during this cycle, which could influence interest rates and monetary policy.
6. Investment Landscape in Stocks and Bonds: The recent data sees potential opportunities in both stocks and bonds in the coming year. The anticipation is based on a combination of factors, including moderating inflation, the possibility of the Fed pausing or pivoting to rate cuts, and a potential re-acceleration of economic and earnings growth. These factors are seen as potential drivers for a rebound in consumption and present opportunities for investors.
7. Central Bank Policy and Market Volatility: Developed market central banks have signaled a commitment to high-for-longer policy rates. The recent bounce in U.S. stocks, driven by a Fed pause and slowing wage growth, underscores the volatility in the new macro regime. The preference for international stocks is emphasized, and there's a cautious stance on U.S. stocks, with a particular focus on the tech sector through an overweight to the artificial intelligence (AI) theme in DM stocks.
8. Regional Disparities in Excess Compensation: There is a recognition of diverse policy, inflation, and growth prospects across regional stock markets, impacting corporate earnings. Excess compensation, measured by the earnings yield minus bond yield, varies widely among DMs. The article highlights opportunities to be selective based on these disparities, with an underweight on U.S. stocks due to compressed excess yield and a neutral stance on UK stocks, while being overweight on Japanese stocks.
9. Bond Market and Interest Rates Outlook: Recent drops in ten-year Treasury yields, the largest in a year, are noted. The decision to go neutral on long-term Treasuries reflects expectations of two-way volatility. Caution is expressed regarding higher valuations in U.S. equities, and potential earnings and profit margin crunch due to higher interest rates and financing costs. Overweight positions in euro area government bonds and UK gilts are explained by locking in higher yields.
10. Global Central Bank Actions and Inflation Expectations: The recent actions of central banks, including the Bank of England and the Federal Reserve, maintaining policy rates unchanged, are highlighted. Expectations are for central banks to hold tight on policy rates despite falling inflation, particularly in the euro area. The investment implications include staying cautious on DM stocks, with a focus on selective exposure based on valuations and earnings prospects.
11. Investment Themes and Macro View: recent data introduces three investment themes: navigating "full-employment stagnation," pivoting to new opportunities in a more volatile market, and harnessing mega forces such as digital disruption, geopolitical shifts, the low-carbon transition, aging populations, and changes in the financial system. The investment implications include an overweight on short-dated U.S. Treasuries, a preference for quality in both equities and fixed income, and an overweight on AI as a multi-country, multi-sector investment cycle unfolds.
12. Growing Debt Concerns: The increasing levels of corporate, consumer, and government debt, adding $5 trillion to the U.S. debt pile in a year, raise concerns about sustainability. The mainstream acceptance of "higher-for-longer" rates applies not only to interest rates but also to borrowing costs for various entities. There is a focus on monitoring signs of deterioration in the ability of the U.S. consumer and corporate America to manage debt.
13. Shift in Fixed Income Dynamics: Fixed Income total returns have been disappointing in recent years, attributed to excessively low interest rates. However, the conditions have changed, and interest rate risk is now more reasonably priced. The risk-reward for bond investors is considered more favorable, with higher nominal and real yields providing a cushion against potential price drops.
14. Diversification and Quality Emphasis: The strategy involves maintaining a high level of diversification and utilizing excess cash to add to higher-quality areas that have deviated below strategic asset allocation targets in both equities and fixed income. The emphasis is on a balanced and diversified allocation, with a focus on high quality in both asset classes.
15. Fed's Support for Equities: The Fed's views supporting equity markets include the belief that further tightening is in the pipeline, the consideration of private sector interest rates as a guide to financial conditions, and the willingness to look past inflation expectations. The "no rush" approach by the Fed is seen as keeping inflation higher for longer, supporting profits and risk-assets. Tight financial conditions reinforce a quality bias, and interest rate volatility is expected to remain elevated.
16. Debt Levels and Risks: recent data suggests that there are concerns about the scalability of the growing debt wall, covering corporate debt maturity, consumer debt levels, and the impact on the U.S. government. The risks associated with high debt levels could weigh on sentiment, impact economic and earnings outlooks, and contribute to market volatility. The recommended investment approach is to maintain a balanced and diversified allocation.
17. Shift in Fixed Income Landscape: The discussion revolves around the recent disappointing performance of Fixed Income and the changing landscape. The shift in initial conditions, with higher nominal and real yields, is highlighted as a positive factor for bond investors. The current risk-reward trade-off is deemed more favorable, and the recommendation is to include an appropriate amount of Fixed Income in a diversified portfolio.
18. Challenges of Traditional Diversification: Recent market drawdowns have challenged the effectiveness of traditional 60/40 portfolios, as stocks and bonds sometimes move in tandem during market fluctuations. The 60/40 blend experienced one of its worst performance periods in 2022, falling over 20% through Q3. This prompts a reconsideration of diversification strategies.
19. Diversification Through Alternatives: The suggestion is to consider adding alternative investments to traditional portfolios, as they may provide additional diversification and complement existing strategies. Hedge fund and private capital strategies are highlighted as potential alternatives, offering unique return, risk, and income attributes. The benefits include exposure to a broader range of opportunities, improved risk-adjusted returns, and access to strategies that may perform well regardless of market direction.
20. Underperformance of Health Care Sector: Despite solid fundamentals and pent-up demand, the Health Care sector, particularly medical device stocks, has underperformed in 2023. Concerns about the impact of GLP-1 drugs for obesity on the medical device industry, including markets for diabetes, orthopedic, and cardiovascular devices, have contributed to this underperformance.
21. Pressure on Preferred Security Prices: Preferred security prices have been pressured by increasing interest rates and credit spreads over the past few years due to their long duration. Limited new issuance is expected due to higher rates, and investors are reminded of the company-specific credit events that can impact these securities.
22. Consolidation in the Energy Sector: October 2023 witnessed significant consolidation in the Energy sector, with the two largest integrated oil majors acquiring two of the largest independent oil and gas exploration and production companies (E&Ps). This is seen as a sign of the maturation of the U.S. oil and gas industry, with E&Ps prioritizing value over growth. The acquisitions are viewed as meaningful for the sector, increasing overall quality.
23. Pressure on Preferred Security Prices: Preferred security prices have been pressured by increasing interest rates and credit spreads over the past few years due to their long duration. Limited new issuance is expected due to higher rates, and investors are reminded of the company-specific credit events that can impact these securities.
24. Bottoming Process: The S&P 500 is seen bottoming in the 4049-4195 support band after a pullback in Q3-Q4. The proprietary indicator tracking the percentage of stocks with positive weekly momentum fell below 10% in late October, historically indicating higher S&P values over the next 20 weeks 70-75% of the time.
25. Expectation of Upside: Indicators suggest a recent meaningful equity market low with further upside expected through year-end into early Q1. The focus is now on the quality and breadth of participation during the recovery. Broad participation across industry groups is viewed as encouraging and supportive of further upside.
26. Rebound and Resistance: S&P, Nasdaq, and Dow Industrials have rebounded strongly to short-term resistance levels coinciding with a 50-62% retracement of the Q3-Q4 decline. The retracement bands are often points of pause, and a temporary pullback is anticipated. However, the positive weekly backdrop suggests any pullbacks are likely to be short-lived.
27. Yield Pullback: The weekly chart for the US 10-year yield highlights an intermediate-term pullback after testing the critical upside level at 5%. Weekly momentum indicators suggest the likelihood of a pullback, and this downturn in rates is seen as a significant macro technical development.
28. Key Levels: Key short-term levels for the US 10-year yield are around 4.5%, with a crucial support band between 4.24-4.3%. Short-term momentum becoming oversold suggests yields are expected to bottom between 4.3-4.5%, likely coinciding with a pullback in equities. Upside resistance levels are between 4.7-4.8%.
29. Oil Correction: WTI Oil is in a corrective trend from late-September highs, breaking below 77 support. Daily momentum indicators becoming oversold suggest oil is likely to start bottoming short-term near the next support band between 71-74.
30. Global Equity Markets and Earnings: S&P 500 Q3 earnings are on pace to break into growth after three quarters of declines, with a year-over-year growth rate of 4.1%. This marks the end of the "earnings recession." The recent equity rally, up 6.5% in the past eight trading sessions, is attributed to the bond market and the Fed. The decline in the 10-year Treasury yield to 4.5% contributed to the S&P 500's rebound. 80% of companies beat consensus earnings forecasts, exceeding the long-term average. However, the magnitude of earnings beats has lagged. 62% beat consensus revenue forecasts, in line with the long-term average.
31. Cautious Forward Guidance: Management teams have been cautious about providing specific guidance for future quarters. More executives have lowered Q4 earnings estimates than raised them. Concerns about uncertainty, challenging macro conditions, inflation, and rising rates are prevalent. The consensus earnings forecast for Q4 has declined more than usual, down 3.9% in October, raising skepticism about the 2024 consensus earnings forecast of $246 per share.
32. Economic Outlook and Recession Concerns: RBC Global Asset Management's Chief Economist, Eric Lascelles, sees a 70% likelihood of the U.S. entering a recession in the next 12 months, up from the previous estimate of 65%. The current data leaves skepticism about the 2024 consensus earnings forecast of $246 per share, which implies year-over-year growth 11.4% above the 2023 consensus forecast.
33. Global Fixed Income Markets: The yield on the 30-year Treasury bond breached its key technical 50-day moving average, indicating potential further decline. Strong demand is attributed to Jerome Powell's comments and a smaller-than-expected boost in bond issuance. High-yield corporate credit is performing well, with the U.S. High Yield Corporate Index up 7.1% year-to-date. Spreads are at +3.9%, about 30 basis points below the year-to-date average. U.S. mortgage rates tumbled, leading to the strongest advance in home purchase applications since early June. Rates remain high, impacting supply and keeping housing prices elevated.
34. Canadian Economic Trends: Canada's trade surplus more than doubled in September, reaching CA$2.0 billion, primarily due to higher crude oil prices boosting energy exports. Higher interest rates are seen as weighing on domestic economic growth. The Canadian bond market is now pricing in rate cuts as early as Q2 2024.
35. European and UK Earnings: The European and UK earnings season has been broadly in line with expectations. Overall EPS for the STOXX Europe 600 Index in Q3 declined by 13% year-over-year, but excluding the Energy sector, it grew 3% year-over-year. Sales growth has been disappointing, with fewer companies beating consensus sales estimates in Q3. Profit warnings have been above average, and the market reaction to negative surprises has been sharp.
36. UK Bond Market and Interest Rates: The UK bond market reacted positively to the Bank of England's decision to hold rates at 5.25%, with Gilts rallying across all maturities. Market sentiment shifted based on mixed messages from BoE officials, with some suggesting possible rate cuts.
37. Asia-Pacific Equity Markets and China's Economic Situation: Asia-Pacific equity markets saw mixed trading, with ASEAN countries leading and more developed markets lagging. China slid into deflation in October, with weak Consumer Price and Producer Price Index readings. RBC Global Asset Management believes further policy action in China is likely to address economic challenges. An unconfirmed report on Ping An Insurance being asked to take over distressed developer Country Garden led to market volatility, highlighting sensitivity to corporate events
38. Market Sentiment and Technical Analysis: The S&P 500 experienced a notable climb of 6.5% from its October 27th lows. Powell's slightly dovish tone at the 11/1 FOMC meeting, supportive economic data, and lower bond yields contributed to this upward movement. October economic surveys indicate a softening macro-environment, with ISM manufacturing declining to 46.7 and ISM services to 51.8. The highlight was the Friday jobs report, showing softer employment and inflation moderation. The Fed may adopt a "wait and see" approach, given softer employment and inflation moderation. The implied odds of another rate hike this cycle have declined to just 15%. Incoming data, including October CPI, PPI, and retail sales, will be crucial.
39. Fundamental Analysis and Earnings: 85% of Q3 earnings season is complete, with 80% of companies beating earnings estimates by 7.4%, above long-term averages. However, price reactions have not been as impressive, and EPS upside is getting slightly less than the average of 0.9% two-day gain. Forward earnings estimates are declining as corporations and analysts brace for economic uncertainties and rising interest rates. Q4 estimates reflect a sequential earnings decline, and 2024 estimates have also declined. While the stock market is up, the market of stocks has been weak. Year-to-date index returns are attributed to just 10 Tech-oriented stocks. The equal-weighted S&P 500 P/E is 14x, inline with valuations seen during the 2014-2016 US manufacturing recession.
40. Technical Analysis and Support/Resistance Levels: The upper end of the downtrend channel is a critical resistance level. After this, horizontal support is observed at 4500 and 4600. Key support levels to watch include the 20 DMA (4282), 200 DMA (4253), and recent lows (4100). Maintaining these support levels is crucial for signaling the potential end of the drawdown.
41. Breadth Thrust and Bond Market Positioning: The market's response from oversold conditions has been positive. Thursday's 2% S&P 500 gain and Friday's 1% gain came with strong breadth, indicating potential strength near market lows. Follow-through is needed for sustained upward momentum. Powell's dovish tone shifted the tighter Fed policy narrative, resulting in a drop in the US 10-year yield to 4.5%. High short interest in the bond market suggests potential for further declines, relieving pressure on equities.
42. Sector Analysis: The utilities sector has been Upgraded to Equal-Weight from Underweight due to the potential for lower rates over time. The degree of decline in the sector is considered overdone. While rates and financing costs remain high, the valuation has shifted from the high end to the low end of its 10-year range. Also, despite increased volatility, mega-cap Tech maintains its leadership, pushing to new relative strength highs. Earnings strength supports the sector's relative performance trends.
43. Overall Market Outlook: Despite acknowledging that the market has work to do for sustainable upside, there is a bias that equities are ready to recover some of their decline, potentially having seen the low of this drawdown. In addition, economic uncertainties and challenges persist, but the market has likely discounted a significant amount of negativity. Inexpensive valuations provide some comfort for accumulating favored stocks within a long-term perspective.
44. U.S. Market Analysis: In the U.S. market, the S&P 500 and Nasdaq Composite experienced mixed performance after a notable winning streak, with the S&P 500 nearly achieving its longest in two decades. The market's strength was concentrated, as indicated by the lagging equally weighted S&P 500, and upside surprises in technology-oriented firms, such as Datadog, supported growth indexes. U.S. Treasury auctions played an influential role in market sentiment, with weaker demand for the 30-year Treasury bond raising concerns about the government's borrowing needs. Limited economic data releases and the unexpected fall in the University of Michigan's consumer sentiment gauge added to market uncertainties, impacting both equity and bond markets.
45. Europe Market Highlights: In Europe, the pan-European STOXX Europe 600 Index ended slightly lower, with mixed performances in major stock indexes. European government bond yields rose amid concerns about "higher for longer" interest rates following hawkish comments from ECB President Christine Lagarde. In the UK, Bank of England Governor Bailey dismissed early talks of cutting interest rates despite Chief Economist Huw Pill's statement, and economic growth remained flat in Q3, matching the BoE's forecast. Eurozone economic indicators pointed to a weak economy, with retail sales falling and German industrial production shrinking. Political developments in Portugal announced a snap election in March 2024 after Prime Minister Antonio Costa's resignation amid a corruption probe.
46. Japan Market Insights: In Japan, stock markets rose supported by strong corporate earnings, government commitment to economic stimulus, and a weakened yen against the U.S. dollar. Bank of Japan Governor Kazuo Ueda warned about the challenges of normalizing short-term interest rates due to potential impacts on financial institutions and borrowers. Japan's cabinet approved an extra budget for Prime Minister Kishida's economic stimulus package worth over USD 110 billion.
47. China Market Overview: In China, equities rose as investors remained relatively unmoved by data showing a slip into contraction in consumer prices and the 13th consecutive month of decline in producer prices. Trade data offered a mixed snapshot of China's economy, with a decline in exports but unexpected growth in imports. Concerns about China's economic growth persisted, leading to expectations of potential further stimulus measures to counter deflationary pressures.
48. Mexico Monetary Policy: In Mexico, the central bank decided to keep the overnight interbank interest rate unchanged at 11.25%, with policymakers acknowledging the advancing disinflation process. The post-meeting statement was slightly less hawkish, noting that the balance of risks for inflation is still to the upside. Analysts do not expect a rate cut in 2023 but possibly in the first quarter of 2024, depending on the trajectory of inflation and economic conditions.
49. Potential moderation in wage growth: There has been a decline in average hourly earnings (AHE) growth to 4.1% y/y, down from a peak of 5.9%. The analysis implies that there might be further moderation in wage growth, especially if the labor market remains tight.
50. Impact of pandemic-related distortions: Pandemic-related distortions in the labor market had initially led to a rapid shift in the composition of the labor market, contributing to higher wages. The easing of this distortion and a return to pre-pandemic labor market composition could potentially take around 50 basis points (bps) out of wage growth.
51. Fed's perspective on inflation and rate hikes: The Federal Reserve (Fed) is monitoring the relationship between economic and labor market conditions to bring inflation back to the 2% target. The acknowledgment of a welcomed decline in average hourly earnings and the potential for further moderation in wage growth could be seen as aligning with the Fed's goal of managing inflationary pressures.
52. Possible impact on Fed's policy decisions: recent data suggests that if wage growth continues to cool and there is evidence of a slowing economy, it becomes more likely that the Fed may not pursue further rate hikes. The combination of moderated wage growth, a resetting of labor market composition, and signs of a slowing economy could influence the Fed's decisions on monetary policy.