Weekly market insights

Institutional opinions:

1. Interest Rates: The recent pullback in yields and a decline in interest rates have been favorable for the stock market. It's predicted that maintaining stability in bond yields, without another significant surge or a sharp fall in interest rates, will be important for the equity market's performance.
2. Positive Momentum in the Stock Market: The recent rally in the stock market is attributed to factors such as a more balanced outlook for future interest rate decisions by the Federal Reserve (Fed), cooling labor-market conditions that can help control inflation, and better-than-expected earnings announcements. This suggests that the stock market may continue to experience positive momentum as we close out 2023 and enter 2024.
3. Monetary Policy: The Federal Reserve's decision to hold interest rates steady and their willingness to keep rates on pause is seen as a key driver of the recent stock and bond market gains. The continuation of this equity bull market will likely depend on the Fed's willingness to remain on pause for further rate hikes.
4. Labor Market Conditions: The Goldilocks scenario in the labor market, where there are ongoing job gains while wage growth remains moderate, is considered positive for the economy. A balance between strong job growth and moderate wage growth is seen as conducive to economic growth and controlling inflation.
5. Historical Trends: Historical data is referenced to suggest that the final two months of the year, November and December, have been favorable for stock-market returns. This historical trend may provide some optimism for investors.
6. Market Corrections: The recent market correction is viewed as a buying opportunity. Previous corrections have typically been followed by significant rebounds in the stock market. This suggests that, despite the potential for future interest rate worries, the recent market correction may have presented an attractive opportunity for investors.
7. Changing Financial Landscape in the U.S.: The data suggests that there are significant shifts occurring in the U.S. financial sector, particularly in the markets for deposits and credit. These changes are expected to have a lasting impact on investment returns in the future.
8. Market Volatility and Interest Rates: The recent data highlights that U.S. stocks hit five-month lows while 10-year Treasury yields have risen above 5%. This indicates that there is increased market volatility and that higher interest rates are a key feature of the current financial landscape. The end of zero interest rates has led to greater competition for bank deposits.
9. Federal Reserve Policy: The Federal Reserve is expected to play a crucial role in shaping the financial landscape. The data suggests that the Fed is likely to hold policy tight, primarily due to an aging population that constrains the workforce and fuels wage pressure. The Fed's role in monetary policy will continue to impact financial markets.
10. Banking Sector and Borrowing: As competition for deposits increases, banks may need to pay higher interest rates to savers, which could, in turn, lead to higher interest rates on bank loans. This might potentially reduce demand for loans and lead to a consolidation of banks to reduce the need to support loans on their balance sheets. U.S. regulatory proposals are expected to reinforce this process.
11. Diversification in Funding: The data suggests that the higher interest rate environment is catalyzing longer-term changes in the U.S. financial landscape, including the expanding role of non-bank credit providers. This diversification in funding sources is seen as a positive development for borrowers.
12. Economic Growth and Consumer Spending: The data highlights that strong consumer spending drove a stronger-than-expected rise in Q3 GDP. However, it is suggested that this level of growth may not be sustainable, as consumers are drawing down their savings and signs of a slowdown in spending are emerging.
13. Investment Themes: The data points towards several investment themes, including the expectation of "full-employment stagnation," where inflation is set to fall further, but long-term inflation expectations are uncertain. It is suggested that central banks will need to keep policy tight to combat inflationary pressures, which may impact asset class returns. The data also emphasizes the importance of income as an investment focus.
14. Portfolio Strategy: The data advises investors to pivot to new opportunities, considering greater volatility and the potential for higher dispersion within and across asset classes. Security selection, expertise, and skill in achieving above-benchmark returns are highlighted.
15. Mega Forces: The data identifies several "mega forces" that are expected to shape the financial landscape, including digital disruption, geopolitical changes, the low-carbon transition, aging populations, and the evolving financial system. These mega forces are seen as drivers of significant shifts in profitability across economies and sectors.
16. An evolving U.S. financial landscape: The Q3 GDP growth exceeded expectations, driven by strong consumer spending. However, this is not expected to be sustainable as consumers may exhaust their savings. The ongoing shifts in the financial landscape, such as surging borrowing costs, geopolitical tensions, and elevated oil prices, point to downside risks for personal income, retail sales, corporate revenues, and profits growth. There is a noticeable increase in risk aversion among investors, which could lead to heightened volatility in the markets.
17. Market backdrop: The S&P 500 has experienced significant fluctuations in recent years due to various global events, including the COVID-19 pandemic, inflation spikes, wars, and fiscal policies. Despite the market's volatility, the S&P 500 has historically outperformed other asset classes, with an annualized return of 11.2% between 1945 and 2022.
18. Thought of the Week - Foreign Financing Matters: Foreign holdings of U.S. Treasuries are at a near all-time record of $7.7 trillion, indicating a significant level of confidence in the U.S. Economy. While China has reduced its holdings of U.S. Treasuries, other countries like Japan and the United Kingdom have increased their holdings. The composition of U.S. Treasury buyers has shifted, with hedge funds, pensions, mutual funds, and insurers becoming more significant players.
19. Investment Implications: Heightened risk aversion is influencing investors to seek high-quality companies with low-cyclicality cash flows. The current era of "higher-for-longer" applies not only to interest rates but also to other key metrics like global oil prices, budget deficits, and political discord. Geopolitical events typically lead to initial market selloffs, followed by recoveries as the worst-case scenarios don't materialize.
20. Yield Curve Inversion and Economic Implications: The current configuration of the U.S. Treasury yield curve, which displays short-term interest rates trading above longer-term rates, has witnessed a substantial inversion. This inversion, characterized by a negative difference between the 10-year and 2-year U.S. Treasury yields, has been a historically reliable indicator of impending recessions, provided it surpasses the threshold of significance (exceeding 25 basis points) and duration (persisting for more than four weeks). While yield curve inversion doesn't directly cause a recession, it acts as a warning signal. Historical data demonstrates that such inversions preceded eight of the past recessions, but there have been exceptions like the mid-1960s, where an inversion was followed by an economic slowdown rather than an official recession. Notably, the 2020 recession, triggered by the pandemic, also saw a yield curve inversion, although it may not apply to unforeseen shocks like pandemics.
21. The Full Picture of Yield Curve Dynamics: It's important to consider that in six out of the past eight recessions, the yield curve transitioned from negative to positive, either slightly before or around the time the recession commenced. Historically, recessions have not both started and ended with an inverted curve; they have always concluded with a positively sloping curve. Currently, there has been a rapid "un-inversion" in the U.S. Treasury yield curve over the past month. Long-term Treasury yields, influenced by the Federal Reserve's policy rate, have surged, narrowing the gap with short-term Treasury yields. Given our outlook that the Fed will maintain higher policy rates for an extended period and be cautious about rate cuts, we anticipate most of the steepening in the yield curve to stem from elevated long-term yields in the near term.
22. Investment Implications: The past three years have posed challenges for fixed-income returns due to the upward movement in yields. However, current long-term U.S. Treasury yields present an attractive opportunity, especially considering our anticipation of an impending U.S. recession. Heightened risk aversion among investors, seeking safe-haven assets like Treasuries, is expected to drive up demand and reduce yields. Additionally, with the Fed's tightening cycle likely nearing its conclusion, expectations of rate cuts in the event of a recession are on the horizon. Under these circumstances, it's reasonable to expect price appreciation in bonds across the yield curve. While there is potential for 10-year U.S. Treasury yields to rise further in the short term, even beyond 5%, we continue to advocate for the implementation of a barbell strategy within bond portfolios. This involves extending duration relative to the portfolio's specific benchmark and prioritizing high-quality investment-grade fixed-income. History suggests that the yield curve is a significant indicator with consistent trends, although the possibility of deviations in the current cycle should be acknowledged.
23. Equities Performance Analysis: Stock returns in 2023 have presented a complex narrative. Despite the double-digit year-to-date return of the S&P 500 Index, it's important to dissect the underlying dynamics. The S&P 500 Index's composition, where individual company performance is weighted according to market capitalization, can mask the performance of a few mega-cap technology-related firms. Seven such companies have seen their year-to-date returns skyrocket by an average of 88%, significantly elevating the S&P 500 Index. However, this obscures the broader weakness evident across various sectors of the stock market. When examining other stock indexes, including those covering large-cap, mid-cap, small-cap, developed market, and emerging market equities, it becomes apparent that most have exhibited minimal gains, with the best among them rising by just 1%. Even the S&P 500 Index, recalculated as an equal-weighted index, has dipped by over 3% this year. These data reflect an overarching theme of tepid stock returns in 2023.
24. Outlook in Light of Impending Recession: With the expectation of a recession looming on the horizon, it's probable that the average stock will continue to face challenges. Investors are advised to emphasize portfolio quality and exhibit preferences for U.S. Large Caps over U.S. Mid Caps and Small Caps. In the international arena, Developed Market ex-U.S. is favored over Emerging Market equities.
25. Crude Oil Supply Dynamics: The recent surge in crude oil prices has been noteworthy, with benchmark prices like West Texas Intermediate (WTI) and Brent registering substantial gains from July through October. Remarkably, this occurred despite slower global gross domestic product growth, highlighting that the primary driver of elevated crude oil prices is not augmented demand but, rather, restricted global supplies. The crux of the supply issue lies in the actions of OPEC+, a consortium of oil-producing countries, which has been diligently reducing oil production for a significant period. OPEC+ has succeeded in driving down global inventories, contributing to the maintenance of elevated oil prices. The reduction has been so effective that OPEC+ has reaffirmed its commitment to prolonging these cuts until the end of 2023. As evidenced in the data, this reduction in supply has resulted in a considerable decrease in global crude oil stocks stored in floating storage units over the past six months.
26. Predictions for Oil Supply and Prices: Given these observations, it's foreseeable that global oil supply will remain constricted, at least until the close of 2023. The year-end 2023 target price ranges for crude oil remain unchanged, with WTI estimated to be between $80 and $90 per barrel, and Brent in the range of $85 to $95 per barrel.
27. Private Equity Activity and Opportunities: Private equity activities have experienced a slowdown in the third quarter of 2023. Exit values were at their second lowest since the 2008-2009 financial crisis, surpassed only by the pandemic-driven downturn in the second quarter of 2020. These circumstances have limited the capital available for distribution to investors. The reduced exit activity, coupled with economic uncertainties, has contributed to a 15% drop in year-to-date fundraising through September.
28. Opportunities in Private Equity: Despite this backdrop, three areas show promise: The secondary market serves as a valuable tool for returning capital to investors under less-than-ideal exit conditions. Also, a notable uptick in interest is observed in the middle market, as its share of private equity fund closings reached the highest level since 2009 in the third quarter. Increased middle market deal activity is attributed to smaller deal sizes and more attractive valuations. In addition, in 2023, growth equity deals are expected to surpass other private equity deals. This segment typically focuses on faster-growing and often profitable companies with lower capital requirements.
29. Equity Market Analysis: Early indicators point towards the development of an oversold intermediate-term equity low. Throughout Q3 and into Q4, equity markets have seen a pullback, approaching oversold conditions near crucial support levels. The catalyst for an equity rebound hinges on a decline in interest rates, which is perceived as a key driver for such a resurgence.
30. Momentum Indicators and Support Bands: Weekly momentum indicators for the S&P and Nasdaq, which track moves over 2-4+ months, have transitioned from overbought levels at the beginning of Q3 to oversold levels through October. This transition suggests that both markets are at the nascent stages of bottoming near support bands, represented in blue. It is anticipated that this trend will likely result in a rebound extending through the year-end.
31. Role of FOMC Meeting and Treasury Auction: Today's FOMC meeting and a closely monitored treasury auction hold significant implications for signaling potential changes in the interest rate uptrend. With weekly momentum indicators indicating overbought conditions and signs of stalling, a drop below 4.7% followed by 4.5% in U.S. 10-year yields is required to suggest that the uptrend in rates may be reversing. On the other hand, a push above 5% in U.S. 10-year yields would signify a continuation of the rate trend, likely leading to further declines in equities, with key support levels at S&P 4049 and Nasdaq 12,269 coming into focus.
32. Equity Rebound and Market Correction: The S&P and Nasdaq markets exhibit a pattern characterized by three downside movements, often defining the final stages of a market correction. Daily momentum indicators, as shown in the top panel, have become oversold and are displaying signs of bottoming, which is indicative of a potential 2-4 week rebound.
33. US 10-Year Yield and Its Trajectory: The direction of the U.S. 10-year yield continues to be a focal point for investors. While the uptrend persists and challenges the critical 5% threshold, early indications suggest that rates may be approaching a peak. Weekly momentum indicators, tracking moves over 2-4+ months, are signaling a potential stall in rates near current levels.
34. Short-Term Pullback and Key Levels: A short-term pullback for the U.S. 10-year yield is currently underway, with a decline under the widely observed 5% level. This pullback is testing a crucial downside range between 4.7% and 4.8%. A move below 4.7% is likely to have a positive impact on equities, with the next significant downside level at the 5-month uptrend at 4.5%.
35. Technical Outlook for Gold: Although gold is not frequently discussed in weekly notes, its technical stance is noteworthy. It has rallied back from substantial support at its rising 4-year moving average in red and is retesting the upper end of a resistance band spanning from 2000 to 2075. In the very short term, gold is overbought, and a pause is anticipated. However, a move above 2075 would represent an essential breakout with the potential to extend towards 2358 and potentially even higher price levels.
36. Fixed Income Market Analysis and Outlook: Following several significant events during the week, it is imperative for fixed income investors to shift their focus beyond yield and towards bond price appreciation and potential high total returns. The average yield on the Bloomberg 5-10Y Gov/Credit Index stands at 5.4%, with an average dollar price below par at $87. When markets price in not only the end of rate hikes but also the timing of the first rate cut, yields may fall, resulting in bond price appreciation and total returns. Reinvestment risk exists for investors who remain in short-dated bonds if they roll over into a lower-yield environment. While it is still early days, there are attractive entry points in the bond market, particularly in the 3- to 10-year part of the yield curve, which offers a favorable risk/reward tradeoff at the moment.
37. Key Market Events: This week marked a momentous period for global fixed income markets and markets in general, even though it appeared that not much occurred in terms of substantial changes. The significance of these events became clear. To start with, there were concerns that the BoJ might abandon its yield curve control program, which caps the 10-year Japanese government bond yield's rise at one percent. While the cap was removed, the BoJ still retains a degree of reference and operational "flexibility" around this level. The potential impact was on the demand for U.S. Treasuries by Japanese investors. In addition, the Treasury Department's decision to address increased financing needs due to rising deficits, primarily attributed to lower tax receipts and reduced remittances from the Federal Reserve, played a role in the ongoing surge in Treasury yields. Also, the Fed recognized tighter financial conditions due to rising yields, declining stock prices, and dollar strength since August. This created headwinds for economic activity, causing a more cautious tone from Fed Chair Jerome Powell.
38. Market Reactions and Indicators: The S&P 500 rose by 4.7% since October 27. The 10-year Treasury note yield decreased by about 32 basis points from its October high to 4.67%. Historically, when the Fed concludes rate hikes, bonds typically perform well, and this trend might continue. As bonds with more duration tend to outperform shorter-dated bonds, it's suggested that investors consider shifting from short-dated securities to intermediate and longer-dated bonds.
39. U.S. Market Analysis: U.S. stocks entered November on a strong note, rebounding after experiencing three consecutive months of declines. The "bad news is good news" perspective emerged, driven by weaker economic data hinting at lower inflation and anticipated lower interest rates. With over two-thirds of S&P 500 companies having reported Q3 2023 earnings, results appear to be satisfactory. However, guidance for the next quarters remains subdued, with concerns about a potential recession in 2024. Weaker economic data includes ISM manufacturing surveys, consumer expectations, and a weak ADP jobs report. However, productivity gains and moderating wage growth could potentially dampen inflation.
40. Canadian Market Analysis: Canada's economy is slowing, with a preliminary September GDP estimate showing no growth for the fourth consecutive month. Higher interest rates have impacted households, leading to declining retail and home sales. The Bank of Canada (BoC) suggests supply and demand are approaching better balance, but wage growth remains strong, and disinflationary momentum is slower than expected. Sluggish growth is expected to persist, but the BoC is unlikely to cut rates until there is clear evidence of slowing core inflation.
41. European Market Analysis: The Bank of England (BoE) voted to keep the bank rate unchanged at 5.25%, indicating a second consecutive pause in the hiking cycle. The BoE's forward guidance suggests policy rates will remain at current levels for an extended period, pushing back on market expectations of rate cuts. The economy may experience a downturn, but the central bank maintains a relatively high bar for further hikes, possibly marking the peak of interest rates.
42. Asia Pacific Market Analysis: South Korea's exports rose for the first time since late last year, indicating global demand resilience. China's factory activity declined in October, highlighting ongoing economic fragility and the need for policy support. HSBC announced a $3 billion share buyback program. Ping An Insurance reported a 5.6% YoY profit decline for the first nine months of the year. Kweichow Moutai became the most traded stock in China's equity market, with record-breaking turnover.
43. Market Overview: The S&P 500 has been in a downtrend since the peak on July 31st, and investor optimism for a soft landing is diminishing. The anticipation of the "higher-for-longer" stance from the Federal Reserve and the accompanying rise in bond yields is creating headwinds for equities. Valuation multiples have contracted as higher rates are expected to impact economic activity, and this is causing concerns of a potential economic contraction and weaker corporate earnings.
44. Future Possibilities: Investors may find a silver lining in valuations and a potential shift in Federal Reserve expectations down the road. The Federal Reserve's dual mandate involves maintaining low inflation and promoting maximum employment. As the economic conditions worsen and employment weakens, it is expected that the Federal Reserve will shift its focus from battling inflation to supporting employment. The market is forward-looking, and valuation expansion typically drives market returns ahead of fundamental improvements.
45. Short-Term View: The S&P 500 index has experienced a 10% pullback over the past few months, and many stocks have seen even more significant declines. Cyclically-oriented sectors of the market have weakened, and this suggests a need for technical recovery to rebuild sustainable upside. However, the pullback also appears to be overdone, with various indicators signaling oversold levels. For investors with excess cash, an opportunity to put funds to work may be present, despite potential short-term volatility.
46. Key Data and Factors to Watch: The upcoming week brings a substantial amount of economic data, particularly in terms of employment figures. The October Jobs Report and ISM Services data will be particularly significant. Employment trends have been influential in economic activity, Federal Reserve expectations, bond yields, and equity markets. Additionally, the influence of bond yields on valuation and equity market movements should be monitored closely.
47. US Macro Outlook: The Federal Reserve is currently in a "wait-and-see" mode with its rate hike cycle, assessing the impact of higher rates on the economy. Data and its effect on bond yields are crucial for equity market movements. The Federal Reserve's "higher-for-longer" messaging has recently pushed bond yields upward, affecting valuations negatively.
48. Q3 Earnings Season: Around 60% of the S&P 500's market capitalization has reported Q3 results so far, with 76% of companies beating earnings estimates by 7.8%. However, despite earnings beats, price reactions have been muted. Forward earnings estimates are declining due to uncertainties related to rising interest rates. Q4 estimates have decreased significantly, now reflecting a sequential earnings decline, with expectations for this trend to continue.
49. Interest Rates and Valuations: Expectations suggest the economy is heading for a contraction, which may lead to weaker corporate earnings. The potential silver lining lies in valuation and the prospect of a shift in Federal Reserve expectations. The Federal Reserve's dual mandate could allow it to shift focus from battling high inflation to supporting employment as economic conditions deteriorate. This shift may result in lower bond yields and support valuation multiple expansion.
50. S&P 500 Technical Analysis: The S&P 500 has been in a downtrend with lower highs and lower lows since its peak on July 31st. The index has seen a pullback of approximately 10%, with numerous stocks trading significantly below their recent levels. The market appears oversold, which might indicate a potential bounce. A positive sign would be if the index breaks through resistance and maintains recent lows during weaknesses, accompanied by a robust breadth thrust in advancers vs. decliners. If the index fails at resistance and continues to drop, it could signal more weakness ahead.
51. Weakening Performance of Cyclicals: Sectors such as semiconductors, transports, consumer discretionary, and banks have displayed signs of weakening, which indicates the need for a technical rebound. However, despite the pullback, many quality companies are oversold. Investors are recommended to put a portion of their excess cash to work with a long-term perspective.
52. Intermediate-Term Trends: Intermediate-term trends remain positive. Indicators like High Beta vs. Low Volatility and Equal-Weighted Consumer Discretionary vs. Staples continue to be in uptrends, with higher highs and higher lows since the beginning of the year, indicating positive intermediate-term returns.
53. Seasonality: While investment decisions should not be solely based on the calendar, it's noteworthy that November marks a more favorable season. The August-October period is historically the weakest, while November-January tends to be the strongest.
54. Market Composition: The market's performance is heavily top-heavy and dominated by a few tech-heavyweights. A significant portion of the S&P 500's year-to-date return can be attributed to the top 10 companies. Diversification remains crucial for long-term performance and risk management, and it's anticipated that underlying strength will eventually shift or broaden. For investors looking to increase exposure to tech or areas left behind, it may be an opportune moment as valuations have become more attractive.
55. U.S. Market Overview: The U.S. market had a strong week with the S&P 500 recording its most robust weekly gain in nearly a year. This rally was fueled by a slowing economy and a dovish stance from the Federal Reserve that led to a significant drop in long-term bond yields. While growth stocks and technology-related companies outperformed, the gains were broad-based, with small-cap stocks in the Russell 2000 Index notably strong. A combination of earnings season, end-of-fiscal-year trading strategies, and the Federal Reserve's policy meeting contributed to the market's positive sentiment. The labor market showed signs of cooling, with job additions falling below expectations in October and the unemployment rate rising, albeit still at a historically low level. Despite these challenges, wage growth remains a key focus, and there are encouraging signs of productivity growth in the workforce. Concerns about Treasury funding eased somewhat as the U.S. Treasury reduced its quarterly refunding auctions, alleviating worries about supply exceeding demand in the bond market.
56. European Market Overview: In Europe, the stock market rebounded after a previous week of losses. Major European stock indexes posted solid gains as the perception of central banks concluding their monetary policy tightening cycles led to declining bond yields. The Bank of England (BoE) maintained its high-interest rates but warned that they would remain at a restrictive level for an extended period. Eurozone inflation slowed, and the economy contracted, particularly in Germany. Declining housing market activity remained a significant concern, as new home sales dropped. However, support measures and expectations of 5% GDP growth in 2023 have kept the outlook relatively optimistic.
57. Japanese Market Overview: Japan's stock markets performed well, gaining around 3% during the week. The Bank of Japan (BoJ) maintained its ultra-loose monetary policy stance but allowed yields to rise more freely within its yield curve control framework. Notably, the BoJ raised its inflation forecasts, indicating a more optimistic view on price growth. The Japanese government announced a fiscal stimulus package to stimulate growth and alleviate the impact of rising inflation, although waning voter support remains a concern. The outlook for Japan's economy and monetary policy remains cautious, but the BoJ's dovish stance has supported sentiment in the market.
58. Chinese Market Overview: Chinese stocks saw gains as speculation arose that U.S. interest rates may have peaked, offsetting concerns about China's slowing growth. Factory activity in China contracted, indicating economic challenges, and the property market's continued decline remains a drag on growth prospects. The housing market's struggles have raised concerns about China's economy, and while the expectation is for 5% GDP growth in 2023, the lack of substantial support for the housing sector has left the economy potentially vulnerable.
59. Other Key Markets (Brazil, Colombia): In Brazil, the central bank reduced interest rates, a widely expected move. Policymakers anticipate further reductions in upcoming meetings, depending on the economy's trajectory. In Colombia, the central bank decided to maintain its interest rate, with a slightly cautious tone due to concerns about sticky inflation and rising inflation expectations. While there's a slight uptick in the growth outlook, the central bank may start cutting rates toward the end of the year, contingent on inflation data.
60. U.S. Economic Strength in 2023: Throughout the first three quarters of 2023, the U.S. economy displayed remarkable resilience, consistently deferring predictions of a mild recession. The first half of the year saw steady growth, despite a setback in the first quarter due to a regional banking crisis. Notably, the third quarter of 2023 saw a substantial acceleration in GDP growth to a real annualized rate of 4.9%, marking the fastest pace in two years. This impressive performance was driven by a surge in private consumption, particularly among affluent households, which contributed more than half of the growth. Other positive contributors included inventory accumulation, housing demand, and national defense spending. However, non-residential investment showed signs of decline, possibly indicating a shift in business sentiment.
61. Challenges and Risks Ahead: While the headline GDP figure is impressive, it may overstate the actual strength of the economy. Several challenges and risks loom on the horizon. The recent increase in long-term yields has put downward pressure on stock markets and poses a risk to the spending spree by wealthier households due to potential negative wealth effects. Positive factors contributing to the growth, such as inventory build-ups and government spending, are likely to be transient in nature. Furthermore, the Federal Reserve, despite acknowledging progress on core-PCE inflation, is expected to keep the possibility of a December rate hike open. This suggests a cautious approach to managing inflation and economic conditions, which could have implications for financial markets and investor portfolios.
62. Investment Strategies and Considerations: In the face of these economic conditions, investors should prepare for a gradual economic slowdown. This may entail maintaining well-balanced portfolios that encompass diversified financial assets to mitigate risks associated with market volatility. Additionally, considering the potential transience of positive economic impulses, exploring alternative investments could be beneficial. Alternative investments, known for providing stable income, enhanced diversification, and potentially robust returns, can serve as a valuable addition to portfolios in this environment. Investors are encouraged to stay informed and adaptable as economic conditions continue to evolve, and new data emerges.

Previous update:

Institutional opinions:

1. Stock Market Correction: The stock market has entered correction territory, with a decline of about 10% from its peak in late July. This correction is attributed to factors such as rising long-term government bond yields and mixed earnings reports from major tech companies.
2. Confidence in the Correction: There is some confidence that the current market pullback will not escalate into a bear market. Several key fundamental drivers and economic factors support the idea that this is a run-of-the-mill correction.
3. Economic Resilience: The U.S. economy has shown resilience, with strong growth driven by consumer spending and government spending. While the pace of growth may slow, a strong labor market and solid consumer finances are expected to support consumer spending.
4. Moderating Inflation: Inflation is on a downward path despite strong economic growth. The Federal Reserve's preferred measure of inflation, the core PCE price index, is expected to continue to moderate. This is seen as a positive factor for the market.
5. Fed's Rate Hikes: The Federal Reserve is expected to end its rate hikes, which historically has been positive for markets. A Fed pause can lead to stock market gains and bond market stability.
6. Peak in Bond Yields: The surge in the 10-year Treasury yield is expected to approach a cyclical peak as economic growth slows and inflation gets closer to the Fed's target. This could relieve pressure on equity valuations and bond prices.
7. Improved Valuations: The recent pullback in stocks has improved valuations, making some segments of the equity market more attractive. Yields in fixed income are also considered attractive.
8. Earnings Rebound: Corporate profits are expected to return to growth, supporting rising stock prices. This is in contrast to the previous year when profits declined.
9. Manufacturing Activity: There are signs that the worst in manufacturing activity is over, which can be a positive signal for the broader economy.
10. Oil Prices: Despite brief spikes in oil prices due to geopolitical uncertainty, they have subsided, indicating a neutral to slightly negative influence on inflation.
11. Investor Sentiment: Investor sentiment has shifted from positive to more skeptical. This contrarian indicator suggests that market corrections may be less likely as complacency decreases.
12. Seasonal Factors: Historically, November and December tend to be good months for stocks, with above-average gains and a higher likelihood of positive returns.
13. Historical Perspective: Historical data shows that corrections within bull markets have been good times to add equities, with stocks recovering in a relatively short time frame.
14. Long-Term Outlook: While short-term volatility is expected to persist, the data suggests that the worst-case scenarios have moved further away. Valuations in many parts of the equity market are below historical averages.
15. Recommendation: The recommendation is to remain opportunistic and consider adding quality investments at lower prices, while maintaining realistic expectations for returns and volatility. Diversification and balance are emphasized as strategies to weather short-term market fluctuations.
16. Stagnating Earnings: U.S. corporate earnings have stalled, and they have remained stagnant along with the overall economy. This stagnation in earnings is expected to continue, and it may not align with the narrative of a resilient economy.
17. Moderate Earnings Growth: While markets expect a pickup in earnings growth starting with the Q3 reporting season, this expectation may not reflect the reality of relatively slow earnings growth. Modest earnings growth is expected to continue, and it might not meet the more optimistic market expectations.
18. Earnings Growth Tied to Mega Caps: A significant portion of expected earnings growth is tied to mega-cap companies, particularly those involved in artificial intelligence (AI). Excluding these mega-cap companies, expectations for broad equities are more muted and may be overly optimistic.
19. Macro Challenges: The macroeconomic backdrop is not favorable for broad equity exposure. Factors such as higher interest rates and stagnant growth have weighed on markets. The economy has experienced "stealth stagnation" in the past 18 months, and this has gone somewhat unnoticed.
20. Inflation Risks: The risk of resurgent inflationary pressures is a concern, and it is expected that the Federal Reserve will maintain a tight monetary policy. Higher interest rates may increase the interest expense for companies, impacting profit margins.
21. Valuations and Relative Risk: U.S. stock valuations remain elevated despite stagnant earnings. When considering higher bond yields, the relative risk of bonds versus stocks is shifting in favor of bonds.
22. Selective Approach: The recommendation is to remain selective in stock investments and to harness mega forces such as AI. Opportunities are seen in sectors like healthcare.
23. Interest Rate Environment: The 10-year U.S. Treasury yield has reached 16-year highs, and this suggests that interest rates may remain higher for an extended period. The Federal Reserve is expected to continue its tightening policy.
24. Full-Employment Stagnation: The economy is navigating a shift in consumer spending and a worker shortage. This is expected to lead to "full-employment stagnation" with inflation going through a rollercoaster ride. Central banks are likely to keep policy tight to combat inflationary pressures.
25. Granularity and Security Selection: Greater market volatility and dispersion are expected, creating opportunities for granularity in investment strategies. Security selection, expertise, and relative value opportunities are emphasized.
26. Mega Forces: Structural changes, referred to as "mega forces," are expected to have a significant impact on profitability across various sectors. These forces include digital disruption like AI, geopolitical changes in globalization, the transition to a low-carbon economy, aging populations, and financial system evolution. Markets are still assessing the potential effects of these mega forces.
27. Macro Strategy: The data reveals a significant increase in inflation uncertainty, with levels not seen since the 1960s, eroding confidence in the 2% inflation anchor. This uncertainty has led to a rise in bond term premia and is attributed to the Federal Reserve's policy shift in August 2020, which tolerates higher inflation. Concerns about fiscal dominance over the Fed's focus on low inflation add to the uncertainty, making inflation hedging more crucial in the current environment.
28. Market View: While a U.S. recession is not the base case, expectations for a recession in the next 12 months are widespread, driven by higher interest rates, elevated oil prices, reduced savings, and geopolitical uncertainties. The diverse and dynamic nature of the U.S. economy leads to "rolling recessions," and these downturns typically have relatively short durations. Recessions are seen as periods of reset and revitalization that leave the economy stronger at the other end. Importantly, recessions can be favorable entry points for Equity investors as they often peak before the start of a recession and bottom before recessions officially end.
29. Thought of the Week: Investor sentiment is currently subdued and defensive, influenced by economic and market uncertainties. Subdued sentiment and high cash balances are considered contrarian indicators for potential Equity upside, especially as we move deeper into Q4, historically a strong quarter for Equities. While the data suggests these contrarian indicators, the overall outlook remains uncertain, and the base case anticipates a choppy market environment with a slight upward trend heading into year-end.
30. Real Assets Spotlight: Europe has made significant progress in filling the natural gas supply void left by Russia, with natural gas storage levels surpassing their five-year average. Factors contributing to this turnaround include milder weather, policy changes favoring wind and solar capacity, and most notably, high natural gas prices that spurred record conservation. While uncertainties like weather and Middle East turmoil persist, the well-above-normal natural gas storage levels should keep heating prices relatively affordable, reducing the risk of an energy crisis during the 2023-2024 winter.
31. Equities: Third-quarter earnings season is expected to show a fourth consecutive quarter of declining S&P 500 profits, with a projected 1% drop. However, if beat rates remain consistent with prior quarters, overall earnings could potentially end up positive. While revenue growth is anticipated at around 1%, margins are expected to decline relative to the third quarter of 2022. Six of the S&P 500 sectors are expected to show negative earnings, primarily driven by a more than 30% plunge in the Energy sector. Companies are contending with a tight labor market, an uncertain economic environment, and headwinds like a weakening consumer, a rising dollar, geopolitical tensions, and a higher cost of capital. Despite earnings estimates moving higher recently, the looming possibility of a U.S. recession challenges earnings in the coming quarters.
32. Fixed Income: The recent rise in bond yields is causing bonds to underperform year-to-date, raising concerns that bond losses will continue to mount. Fixed income investors should remember that bond total returns comprise two factors: price movement and coupon income. Starting yields at the time of purchase significantly affect expected returns over the bond's life, assuming it's held until maturity. The current opportunities in fixed income, characterized by higher available yields, may provide a cushion against further pricing deterioration and allow for price appreciation if yields decline, especially in a recession or a risk-off period.
33. Alternatives: The private equity market has seen a decrease in average exit volumes, impacting investors who rely on distributions from prior investments to fund new private capital commitments. As a result, the secondary market has gained importance, allowing investors to trade interests in private companies before a natural exit occurs. The weak performance of public markets in 2022 has caused many investors to remain overallocated to private markets. This may lead to an attractive opportunity for qualified investors in the secondary market, particularly if further financial market stress, such as a recession, occurs, as discounts on secondary purchases historically widen during times of market turbulence.
34. Equity Markets: Equity markets are currently in corrective trends, with rising interest rates and a strengthening US dollar acting as headwinds. Despite challenging technical levels, the base case remains unchanged, with the expectation of a rebound in the coming weeks. The correction is seen as consistent with seasonal weakness, and weekly momentum indicators are considered oversold. However, for a meaningful low in equities, the uptrend in interest rates needs to reverse. If interest rates continue to rise, particularly exceeding 5% by the US 10-year yield, it could lead to further selling in equity markets. The upcoming FOMC Federal Reserve meeting on November 1 is expected to provide clarity on the path of interest rates.
35. S&P and Nasdaq: The S&P and Nasdaq are experiencing corrective trends, facing trading resistance near their 50-day moving averages and testing trading support near recent lows. Daily momentum indicators remain negative but are expected to become oversold around the time of the upcoming FOMC meeting on 11/1. If they fall below last week's lows, the next support levels are at 4049-4113 for the S&P and 12,714 followed by 12,305 for the Nasdaq.
36. US 10-Year Yield: While it is too early to conclude that a reversal in the interest rate uptrend is occurring, intermediate-term/weekly momentum indicators are showing signs of being overbought and peaking. This suggests that interest rates may begin stalling in the coming weeks. The upcoming FOMC meeting is expected to be a likely catalyst for this potential shift in the interest rate trend.
37. US 10-Year Yield and US Dollar Index: The uptrends in the US 10-year yield and the US dollar index pose major headwinds for equities. Both have rallied to key resistance levels with early signs of stalling, particularly 5% for the US 10-year yield and 107 for the US dollar. Notably, the US dollar has diverged from the new highs in rates, peaking in early October. A reversal in these trends would require a decline below 4.5% for the 10-year yield and 105.3 for the US dollar index.
38. Utilities and Staples: Both the Utilities and Staples sectors have experienced steep corrections as interest rates trended higher. However, there are early signs of bottoming near important technical support levels. Weekly momentum indicators are oversold for both sectors. The utility sector is beginning to stabilize at its 62% retracement level, while the staples sector is bottoming near its 2022 lows. While new bull cycles are not expected in these sectors, they appear to be in the early stages of bottoming.
39. Belt and Road Initiative (BRI): China recently hosted the Third Belt and Road Forum for International Cooperation, coinciding with the 10th anniversary of the BRI. Over the past decade, the BRI has evolved significantly from its modest beginnings as an idea for economic development in the Eurasian region. It has expanded into a comprehensive representation of China's foreign policy, with 154 member countries representing 80% of UN member states. The initiative has also shifted its focus from regional to global projects. Notably, the completion of the China-Europe Railway Express (CRE) has established a substantial freight rail network connecting Europe and Asia, fostering trade. The BRI's scope continues to evolve, emphasizing renewables, green projects, information and technology infrastructure, and scientific and technological innovation. The initiative aims to support smaller, smart modernization projects in developing countries to enhance local living conditions and promote green development. Concerns about "debt trap" diplomacy have been debunked, with studies suggesting China has shown flexibility in debt negotiations, often offering favorable terms to borrowers.
40. United States: U.S. equities have experienced moderate losses for the week as quarterly earnings are reported. While most major indexes are lower, the Dow Jones Industrial Average has been the best relative performer, down by -0.96%. The S&P 500, down 2.07%, has outperformed the Nasdaq Composite, which has seen a -3.15% return. The earnings season has revealed that 46% of companies have reported sales exceeding analyst expectations, and 78% have beaten earnings expectations. The U.S. GDP grew at an impressive 4.9% annual rate in Q3, highlighting the strength of the U.S. economy. Economic activity in the private sector has also expanded, with the Purchasing Managers' Index increasing to 51.0.
41. Canada: The Bank of Canada (BoC) has maintained its overnight policy rate at 5%, while acknowledging increased inflationary risks. Past interest rate increases have led to reduced consumer and business activity, particularly in housing and business investments. Rising immigration has alleviated labor market pressures. Overall, rates are expected to stay higher for longer. The Real Estate sector has been impacted by higher financing costs, but it has generally fixed-rate debt, making income distributions sustainable. The sector can be viewed as a bond proxy, making it less attractive in the current environment. The performance of the Real Estate sector has been challenged.
42. Europe: The European Central Bank (ECB) left interest rates unchanged at 4%, the first pause after 10 consecutive hikes. The ECB hinted at a "higher for longer" narrative, as rates are expected to remain at the current level for an extended period. The euro area faces increased risk of a recession, with economic stagnation and a slowdown in economic activity across manufacturing and services sectors. The Q3 euro area bank lending survey indicates that higher interest rates are affecting the economy, leading to tighter lending standards and lower demand for loans from households and businesses.
43. Asia Pacific: China plans to issue an additional RMB 1 trillion (US$137 billion) in government bonds to support flood-control projects and improve disaster prevention and relief capabilities. This action reflects a commitment to stimulate economic growth and ease the fiscal burden on local governments. South Korea's export data shows early signs of stabilization, with headline exports up 4.6% and daily average value exports up 8.6% year-on-year for the first 20 days of October, potentially marking the first year of export growth in a year if the trend continues. This data offers insights into the direction of global trade and supply chains.
44. Equity Market Momentum: Momentum in the equity market is waning due to a recent breakdown in the uptrend, driven by rising bond yields, which have become a market headwind. The S&P 500 has broken below its 200-day moving average (DMA), making it vulnerable to a move to the range of 3900-4200 in the near term. Equities are expected to remain challenged until bond yields stabilize. A quick reversal in bond yields could relieve selling pressure and allow equities to resume their uptrend. However, if the 10-year yield continues to rise, equities may remain volatile.
45. Sector Rotation: Some rotation has been observed into more defensive sectors of the market, away from areas with relative strength, like the semiconductor index. This shift suggests caution in the near term. However, a longer-term view remains constructive on equities due to positive intermediate-to-long-term signals favoring the bulls.
46. Influence of Bond Yields: Rising bond yields are the most influential factor for equities in the near term. If bond yields break above 5%, it could pressure equities and increase volatility. Conversely, if bond yields are peaking, equities may stabilize following the recent sell-off.
47. Bifurcated Market: The YTD returns for the S&P 500 paint a more positive picture than the reality of individual stocks. The average stock (S&P 500 equal-weight index) is down 3.1% YTD, and nearly half of S&P 500 constituents are in a bear market, despite the S&P 500 being only about 9% off its high. This one-dimensional market leaves the S&P 500 vulnerable to increased volatility.
48. Earnings Season: Over 30% of S&P 500 market cap has reported earnings for Q3. While 74% of companies have beaten expectations by an average surprise of 6.5%, it represents a deceleration from previous quarters. The price reaction to earnings has been muted, with the average stock down 0.7% the day after reporting earnings. Earnings estimates are under scrutiny, and revisions will be closely monitored.
49. Macro Data: Macro data continues to show mixed data points. Strong retail sales and expansionary Markit PMI data point to a resilient U.S. consumer and economy. However, leading economic indicators have been weakening, which can be a recessionary signal. Economic momentum is viewed as relatively resilient, but the possibility of a period of economic softness in 2024 remains the base case.
50. U.S. Market Sentiment: The major U.S. stock benchmarks have finished lower for two consecutive weeks due to mixed corporate earnings reports and concerns about higher interest rates. Market sentiment may continue to be influenced by quarterly earnings reports and their impact on share prices. Investors will closely watch the performance of major tech giants, such as Amazon, Alphabet, Facebook, and Microsoft, as they have played a significant role in market results.
51. Economic Growth: The U.S. economy showed strong growth in the third quarter, with GDP expanding at an annualized rate of 4.9%, driven by robust consumer spending. A sustained economic recovery may support overall market stability. However, the Federal Reserve will be monitoring inflation, as core PCE remains above its 2% long-term target, and decisions made during the October 31-November 1 policy meeting may impact market dynamics.
52. Interest Rates and Bond Yields: The 10-year U.S. Treasury yield briefly crossed the 5% level but retreated to around 4.8%. The direction of bond yields remains a key factor for market performance, and the ability of yields to stay below or above certain thresholds will continue to influence investment decisions and asset allocation.
53. European Market Uncertainty: European markets experienced uncertainty related to interest rates, economic conditions, and geopolitical conflicts. The European Central Bank (ECB) decided to leave interest rates unchanged, indicating a cautious approach toward inflation and economic challenges. Eurozone business activity continued to contract, particularly in the manufacturing sector, which may contribute to market instability.
54. Japan's Market Sensitivity to Yields: Japanese stock markets experienced fluctuations due to rising bond yields and geopolitical tensions. Speculation about potential interventions and adjustments to yield curve control policies by the Bank of Japan (BOJ) remains a market focus. The authorities are closely monitoring currency markets and inflation.
55. China's Economic Stabilization: Improving industrial profits in China suggested economic stabilization. The government's measures to issue additional sovereign debt and raise the fiscal deficit ratio indicate efforts to support financial markets and the economy. However, challenges persist in the property market, with defaults by large property developers impacting market sentiment.
56. Central Bank Actions in Emerging Markets: In Turkey, the central bank raised its key policy rate to curb inflation. The impact of such measures on inflation and economic stability will be closely monitored. In Hungary, the National Bank reduced its policy rate due to declining inflation, which could stimulate economic activity.

Previous update:

Institutional opinions:

1. Yield Movement in the Near Term: The data suggests that in the near term, 10-year Treasury bond yields may continue their upward trajectory, possibly surpassing the 5% mark. Factors contributing to this trend include the robust U.S. economy, which has defied recession expectations and driven above-trend growth. This growth has exerted upward pressure on yields, reflecting the economy's prospects. However, this pressure could potentially ease as economic growth moderates in the coming quarters. Additionally, the increase in Treasury supply due to the fiscal deficit, coupled with decreased demand from entities like the Federal Reserve and certain foreign buyers, has resulted in a supply/demand imbalance that is pushing yields higher. The rise in global interest rates, particularly in major economies like Japan, is another factor affecting U.S. Treasury yields.
2. Factors Driving Yields Higher: Several key drivers have led to the recent surge in 10-year bond yields. First and foremost, the resilience of the U.S. economy, marked by above-trend growth, has been a significant force behind the rising yields. The expectation of a strong third-quarter GDP growth rate, driven by a robust labor market and consumer spending, has contributed to this pressure. Supply and demand dynamics also play a crucial role, with the U.S. Treasury increasing the issuance of bonds to address the growing fiscal deficit, while natural demand from institutions like the Federal Reserve and certain foreign buyers has weakened. Furthermore, the trend of global central banks raising interest rates, as exemplified by Japan, is crowding out demand for U.S. government bonds, amplifying the yield increase.
3. Future Yield Range: The notion of a "new normal" for 10-year Treasury yields is a key consideration. This new normal, expected to be in the range of 3.5% to 4.5%, signifies a shift from the historically low levels witnessed in the post-2008 era. It is based on the premise that the U.S. economy may experience more moderate growth rates around 1.5% to 2% and core inflation around 2% to 2.5%. While short-term fluctuations can lead yields to overshoot this range, the belief is that, over time, yields will consolidate and eventually reach their peak. This may coincide with the Federal Reserve and global central banks pausing their rate hikes, which would exert downward pressure on 10-year yields, aligning with historical patterns.
4. Portfolio Implications: The implications of these shifting yield dynamics are significant for portfolio management. With higher yields, the equity market is expected to undergo a transformation, leading to a more balanced performance between growth and value stocks. Investors may increasingly favor the better-valuation and higher-dividend segments of the market. Bonds, as a result of higher yields, are likely to become more prominent within portfolios. The expectation of better income and total return from bond portfolios will make diversification across and within asset classes a critical strategy for investors seeking to adapt to the "new normal" in long-term interest rates. Ultimately, the evolution of yields will influence investment strategies and asset allocation, and well-diversified portfolios are positioned to capture opportunities in both equities and bonds.
5. U.S. Yields: Two-Way Volatility Ahead: The tactical outlook for long-term Treasuries is shifting to neutrality as markets have already priced in the expectation of high policy rates. The next phase is not expected to be an overweight position on long-term Treasuries, as investors are likely to demand more compensation for holding bonds in a higher-yield environment. This outlook reinforces a strategic underweight position in the long run. The downgrade of high-grade credit is also suggested.
6. Higher Interest Rates as Part of the New Regime: The focus on higher interest rates as part of a new economic regime is underlined. Factors contributing to the shift to underweight long-term Treasuries are supply constraints making inflation persistent, the expansion of bond supply due to high deficits, and increased macro and geopolitical volatility. The repricing of Federal Reserve policy rates is considered a significant driver of the yield increase. Expected policy rates nearing a peak are driving the yield surge, and rising term premium is predicted to be the next driver of higher yields. It's suggested that 10-year yields could reach 5% or higher in the longer term, while the gap between investment-grade credit and 10-year bond yields has not widened as expected, resulting in further downgrades in credit.
7. Two-Way Volatility and Near-Term Uncertainties: The near-term outlook suggests two-way volatility for Treasury yields. The Federal Reserve is likely approaching the end of its fast-paced rate-hiking cycle, and policymakers are shifting their focus to assessing financial conditions. The potential damage from further rate hikes may become clearer over time, possibly leading to a shift from the "politics of inflation" to pressure on the Fed to ease monetary policy and support economic activity. Despite expectations of rising yields, uncertainties about the drivers of further yield increases and tightening financial conditions are expected to create more volatility in the near term.
8. Investment Themes: The investment themes identified are driven by the assessment of the current economic environment. The anticipation is that we are entering a period of "full-employment stagnation," marked by shifts in consumer spending, labor shortages, and persistent inflation. Central banks are expected to keep policy tight to combat inflationary pressures, which may not be conducive to broad asset class returns. Income-focused investments, particularly short-dated U.S. Treasuries, are highlighted. Greater volatility and dispersion in asset performance may lead to a focus on granularity in portfolio construction. Quality in both equities and fixed income is favored. Finally, structural changes in the global economy, referred to as "mega forces," are identified as transformative factors influencing profitability across economies and sectors. These include digital disruption, geopolitical shifts, the transition to a low-carbon economy, demographic changes, and financial system evolution.
9. Resilience of the S&P 500: The S&P 500 has shown resilience in the face of various challenges, including monetary tightening, housing and profits recession, shifts in the commercial real estate sector, weak global growth, and geopolitical shocks. It is suggested that the market's resilience is due to factors like the Federal Reserve's approach, fiscal stimulus, the housing market's pent-up demand, and the evolution of the global energy system. The S&P 500 may continue to exhibit resilience in the near term as long as the Federal Reserve maintains a cautious approach and fiscal stimulus remains supportive. However, future resilience may depend on how these factors evolve.
10. Inflation Transition: The data indicates that the macroeconomic environment is transitioning away from low inflation, low growth, and low rates. There is uncertainty about whether the recent spike in inflation is transitory or a more structural shift. Depending on how the Federal Reserve responds to inflation, it may lead to a structurally higher inflationary environment compared to the last decade. Investors should watch for the Fed's actions and inflation trends for insights into market performance.
11. Israel-Hamas War and Global Markets: The conflict between Israel and Hamas is expected to have a limited immediate impact on the global economy and markets, with most economic fallout confined to Israel and the Palestinian territories. The biggest market impact has been felt by local Israeli equities and some regional markets. Unless the conflict escalates significantly, it is unlikely to have a major global economic impact. The local defense industry may benefit from increased spending. Investors should monitor energy prices, as any major geopolitical disruptions could lead to significant effects on global markets, particularly on oil-importing countries.
12. Asset Positioning for Inflation: The data suggests that different asset classes perform differently during inflationary periods. Historically, equities tend to outperform fixed income during periods of accelerating inflation, while international developed and emerging market equities have fared well. Gold and commodities can be volatile but may perform well. Investors should consider asset allocation strategies based on their views on inflation. A well-diversified portfolio is recommended, as inflation's impact on asset classes can be influenced by various factors beyond inflation itself.
13. Impact of Inflation on Asset Classes: The data points out that performance dynamics can shift after the peak in inflation, with small-cap and value stocks potentially outperforming large-cap and growth stocks. Fixed income may perform better post-peak than during accelerating inflation. Post-peak inflation, investors may want to adjust their portfolio to favor small-cap and value stocks. Understanding these shifts can be valuable in making investment decisions.
14. Global Impact of Geopolitical Conflicts: While the Israel-Hamas conflict has primarily affected local markets, the possible implications for energy prices should be closely monitored. Geopolitical events can influence oil production, which can have a significant impact on global markets. A larger geopolitical impact on oil prices could potentially disrupt global equity markets, especially for major net oil-importing regions. Investors should keep an eye on geopolitical developments that may affect energy prices.
15. Correlation Between Equities and Fixed Income: The correlation between equities and fixed-income asset classes has increased significantly in the past two years, raising concerns about the effectiveness of holding bonds in a diversified portfolio. This shift has been influenced by the Federal Reserve's tightening campaign and higher interest rates. If correlations remain elevated and interest rates continue to rise, it may be challenging to rely on fixed income as a counterbalance to equity market volatility in the short term. Investors should closely monitor these correlations and adapt their portfolio strategies accordingly.
16. Stocks vs. Bonds: There are questions about the value proposition of stocks versus bonds, especially with long-term Treasury yields nearing 5%. While Treasury rates exceed visible stock yields (dividends and buybacks), the data suggests that stocks offer more than just yield and that earnings play a crucial role in stock price gains. Despite the attractiveness of bonds, stocks may continue to provide a compelling investment opportunity due to their potential for earnings growth. Investors should consider the overall investment environment and their risk tolerance when deciding between stocks and bonds.
17. Benefits of Holding Bonds: The data highlights five reasons to continue holding bonds, including performance, diversification, lower volatility compared to equities, yield potential, and liquidity. These factors emphasize the importance of bonds in a well-diversified portfolio. Bonds can still serve as a valuable asset class, providing stability, income, and diversification to investors. The choice between bonds and equities should be guided by individual financial goals and risk tolerance.
18. Gold Market: Gold prices have faced headwinds, including rising global real interest rates, high U.S. Treasury yields, and a stronger U.S. dollar. These factors have affected the demand for gold, which is often traded in U.S. Dollars. Gold prices may remain under pressure in the short term, particularly if the U.S. dollar continues to strengthen. However, long-term fundamentals for gold, such as tight supply, may support its value, and a potential weakening of the U.S. dollar could benefit gold prices in the future.
19. Rise in Interest Rates and Distressed Opportunities: The data suggests that the past decade of low interest rates has ended, with the Federal Reserve raising rates multiple times. This may lead to opportunities in distressed credit, particularly for hedge funds that specialize in restructuring debt obligations for companies facing financial stress. As interest rates continue to rise, distressed credit hedge funds could perform well by helping companies navigate financial challenges. Opportunities in distressed debt may expand in the coming years as higher rates impact overleveraged businesses.
20. Recession Indicators: The data highlights three indicators that can provide context for predicting a potential recession: the steepening of the U.S. Treasury yield curve, job losses over a three-month period, and deteriorating consumer confidence. While none of these indicators currently signal an imminent U.S. recession, they should be closely monitored. If one or more of them are triggered soon, it could indicate an increased risk of recession, prompting more defensive portfolio positioning.
21. Yield Curve Steepening: The data mentions the yield curve's recent shift from an inverted position to re-steepening, suggesting resilience in the labor market and the wider economy. The bond market's belief that the Federal Reserve will maintain higher interest rates for an extended period may lead to margin squeezes and impact corporate profit margins. If the yield curve continues to re-steepen, it could be a second warning signal of a possible recession, particularly if interest rates remain elevated. This may lead to potential economic pressures and employment challenges.
22. Job Market: The data indicates that job losses would be a signal of an imminent recession. However, the U.S. labor market is currently robust, with a significant number of job openings and positive job creation. While the labor market remains strong for now, the rapid turnaround in previous cycles suggests that job losses could materialize quickly. Monitoring job market trends is crucial to assess recession risks.
23. Consumer Confidence: Deteriorating consumer confidence can also signal the onset of a recession. The data shows a survey-based indicator where consumers' perceptions of the current economy versus future prospects play a significant role. The indicator has declined in the current cycle, but a sustained increase could indicate a recession is underway. Monitoring this indicator, alongside other economic data, is essential for assessing the overall health of the economy.
24. Inflation and Interest Rates: In Canada, the data indicates that inflation decelerated in September due to prior rate hikes. The Bank of Canada may consider extending its rate-hiking pause as it watches for incoming data, even though inflation has recently cooled off. The central bank's stance may depend on factors such as job creation, gasoline prices, and mortgage interest costs, which could influence inflation. The BoC's decisions will be based on incoming economic data and their impact on inflation.
25. Political Landscape in Poland: The data highlights a change in the political landscape in Poland following recent elections. The centrist shift could have implications for the country's relationship with the EU and the rule of law. The political changes may lead to a more pro-European stance in Poland, but the governing process may be complicated due to key state institutions still being led by previous loyalists.
26. China's Economic Data: China's GDP growth in Q3 exceeded expectations, driven by government stimulus efforts. Despite concerns about the real estate sector, the data puts Beijing's 5% GDP growth target for 2023 within reach. The positive economic data could impact market confidence, particularly in the real estate sector. Continued attention to real estate-related issues and credit concerns among developers is warranted.
27. Taiwan Semiconductor Manufacturing Co. (TSMC): TSMC reported better-than-expected Q3 earnings due to strong demand for AI chips. The data indicates that demand for AI chips is robust despite a sluggish global economy. The data suggests that the demand for AI-related technology and chips remains strong, and this trend may continue into 2024. It indicates ongoing technological growth and innovation.
28. Equity Market Trends: The equity market has undergone a pullback and is now experiencing a bounce from oversold conditions. Bond yields and Federal Reserve (Fed) expectations have been the primary drivers of market movements. The recent dovish comments from the Fed and the shift in market expectations for rate hikes suggest that the central bank might be on pause for now. This could provide support for equities, but near-term price momentum has been lost. Whether the market can regain momentum and break through resistance levels or if it remains constrained will be key to watch.
29. Upcoming Data and Earnings Seasons: The upcoming September Consumer Price Index (CPI) report and the Q3 earnings season are highlighted as crucial factors for stock performance. Earnings estimates have been steady, with strong results in Q1 and Q2 buoying expectations. The market will closely watch earnings season to gauge how companies are responding to current business trends and their outlooks. Earnings performance in sectors under pressure, such as Utilities, Staples, and REITs, will be closely scrutinized. Additionally, Consumer Discretionary, which has been facing challenges, will be of interest. If earnings hold up in the face of market pressures, they may present opportunities.
30. Technical Analysis: Technical analysis suggests that the S&P 500 has found support, but near-term price momentum needs to be rebuilt. The levels to watch include ~4410-4450 as important resistance and the 200-day moving average and recent lows (~4215) as crucial support. The technical analysis indicates that the market is at a critical juncture. Rebuilding momentum and breaking through resistance levels will be essential for a sustained market recovery. Conversely, if the market fails at resistance and breaks to new lows, it could increase the odds of further downside.
31. Bond Yields: The Fed's recent policy outlook led to a surge in the 10-year bond yield from 4.37% to a recent peak of 4.89%. Recent Fed comments have leaned dovish, and odds of another rate hike have dropped. The direction of bond yields remains critical for equities. While the recent technical price target was nearly reached, the upward trend in bond yields continues. How yields evolve will significantly influence the equity market. If bond yields stabilize, it could provide relief to the equity market.
32. Interest-Sensitive Stocks: Interest-sensitive sectors have experienced intense pressure due to rising bond yields. These areas may be deeply oversold in the short term. A stabilization in bond yields may provide some relief, but the sustainability of performance trends in these sectors will be a key focus. Opportunity may emerge in these sectors as market dynamics evolve.
33. U.S.: The Nasdaq Composite Index has faced significant headwinds, almost returning to bear market territory, mainly due to geopolitical concerns, Federal Reserve comments, and rising long-term bond yields. The Fed appears unconvinced that inflation is under control, which has implications for future monetary policy decisions. The direction of the Nasdaq Composite Index and growth stocks will likely remain sensitive to geopolitical events, particularly in the Middle East. The market may continue to experience increased volatility as a result. The Federal Reserve's stance on inflation and interest rates will be closely monitored. Any shift in policy expectations could impact market sentiment and direction.
34. Europe: European stock markets, including STOXX Europe 600, experienced declines due to concerns about interest rates and the potential escalation of conflicts in the Middle East. Disappointing earnings reports also weighed on the mood. European government bond yields increased as investors considered the possibility of higher interest rates driven by persistent inflation. European markets may remain sensitive to interest rate developments and geopolitical events, particularly the situation in the Middle East. European Central Bank policymakers are monitoring oil prices, and if inflation remains a concern, interest rates may stay on hold for some time. This suggests a cautious approach to monetary policy in Europe.
35. Japan: Japan's stock markets faced declines amid expectations of prolonged higher interest rates. The Bank of Japan (BoJ) has been adjusting its yield curve control policy to allow yields to rise more freely but cap them at 1% to achieve gradual increases. The BoJ's approach to controlling yields and supporting gradual increases will continue to be a focus in Japan. Wage growth is essential to meeting inflation targets, so any signs of changing wage-setting behavior will be closely monitored.
36. China: Chinese stocks saw significant declines as issues in the property sector overshadowed better-than-expected gross domestic product (GDP) data. Concerns about property market troubles and falling home prices persisted despite robust economic growth in China. The property market situation in China is a significant concern, and its resolution will likely impact investor sentiment and market performance. While GDP growth was strong, it may not be sufficient to offset concerns in the property sector, and markets will closely follow these developments.
37. Poland and Hungary: Political developments in Poland, including the election results, and the potential impact on relationships with the European Union are in focus. Hungary's central bank is aiming to combat inflation and maintain positive real interest rates. Political developments in Poland, especially related to its relationships with the EU, could impact market sentiment, and resolving EU fund issues will be essential for economic stability. In Hungary, a tight monetary policy will be maintained, and interest rate reductions may be considered in the coming years if inflation trends toward the central bank's target. Fiscal targets in Hungary might be challenging to meet.
38. Inflation Expectations: The data indicates that headline inflation rose 0.4% month-on-month (m/m) and 3.7% year-on-year (y/y) in September. Energy prices, particularly gasoline prices, have contributed to this rise in inflation. However, the data suggests that the recent increase in gasoline prices might be temporary and that gasoline prices may decline in October and November. If gasoline prices indeed decline as suggested, it may lead to a decrease in the overall Consumer Price Index (CPI) inflation. The downward trend in gasoline prices could potentially offset some of the inflationary pressures, leading to reduced headline inflation in the coming months. This reduction in CPI inflation might discourage the Federal Reserve from imposing further interest rate hikes.
39. Impact on Monetary Policy: The expectation of reduced inflationary pressures and a potential decrease in interest rates in 2024 suggests that the central bank (in this case, the Federal Reserve) might adopt a more accommodative monetary policy stance. A more accommodative monetary policy could support economic growth by making borrowing cheaper and encouraging spending. Lower interest rates could also influence investment decisions and boost asset prices.
40. Oil Prices and Refining Margins: The data highlights the relationship between crude oil prices, gasoline prices, and refining margins. Refining margins can impact the final cost of gasoline. Monitoring refining margins is crucial for understanding the potential effects on consumer prices, such as gasoline prices. Variations in refining margins may impact the extent to which changes in crude oil prices affect the prices at the gas pump.