Your Invited to the Party (Bull Market is turning 1!!! - Update)

The bull market turning a year old. And just like every 1 year old’s birthday, it’s a reason to get a smash cake and celebrate. Coming from the bottom on October 12th the S&P 500 returned over 21% and the equally weighted index returned over 13%. MSCI world index up 19% not bad some would say. US Lipper Large Cap growth Index returned 30%....Lipper US treasury Money market Index underwhelming 4%....

Can you Guess what asset class is leading Net Flows for 2023?? Money Market. Below is the Cumulative Net flow into each asset class for 2023… $717 Billion has flown into Money Market. Second is Fixed Income $130 Billion in flows.

Sir John Templeton mentioned that Bull Markets are born on Pessimism.... I would say people gave up 20% for 4%, I would say they are feeling pessimistic and skeptical about positive market returns. Let’s review some topics from the year and discuss what we can expect in q4 and potentially beyond.

Bull Market Fun Facts

History has shown bull markets last longer and returns are stronger, on average, than bear markets’ losses. Bull markets have lasted from 26 months to as lengthy as 131 months. Since 1946, there have been 11 bear markets with an average decline of 34% and an average duration of 16 months. During the same period, bull markets have averaged over five years in duration and 151% cumulative return for the S&P 500 Index.

Narrow Market

Yes , a narrow market - everyone says this market is held together by a few stocks.The Magnificent 7.. its is possible but let’s rewind. Take a look at the chart below representing the bear market of 2022. Interestingly, during the downturn, not much attention was given to how FANG stocks led the way down. However, in contrast, the S&P 500, S&P500 Equal Weight, and Value Line Composite outperformed. In contrast, the upward trajectory of FANG stocks this year is a familiar sight during the early stages of bull markets. It's not uncommon for the stocks that were hit the hardest during a bear market to bounce back swiftly. Traditionally, small-cap stocks tend to lead in bull markets. It's likely that we'll witness this phenomenon later during this bull market, although it may not be the hot topic of conversation at that time. Currently, this shift hasn't occurred due to the challenges faced by the Financials sector (which comprises 20% of the small-cap index). As the bull market matures, we can expect the dynamics to flip once again. As breadth narrows, big-cap growth stocks tend to outperform their smaller counterparts. Big growth sectors are typically less cyclical and require less capital investment. Their growth is often fuelled by innovation, new products, and expanding market penetration (think Energy, which is a mature market). Moreover, they are generally less dependent on debt financing compared to industries like industrials. Consequently, as the yield curve flattens or inverts, big-cap growth stocks tend to be favoured over small-cap value stocks.

Rising Bond Yields Bad for stocks & Tech???

Do higher bond rates really dictate stock performance??? I would argue no.... Even though recent sentiment would suggest otherwise.

10 year Treasury yields climbed from 1.39% to 3.00% from July 2012 – January 2014, Us Lipper Science and Technology Index rose stocks rose 34.1. From July 2016 – November 2018, That index returned 69.7despite Treasury yields’ also more than doubling (1.37% to 3.23%).

In 2003, 10-year yields jumped from 3.13% to 4.60% between June and September—yet Tech was up 10.06%

US DEBT

The US national debt has been a hot topic lately, but is it really a problem? Interest payments as a share of federal receipts have been relatively low over the past 20 years, even though the debt has increased. In fact, the 1980s and 1990s, when debt was more affordable, it was pretty good time for the US economy and the market. It's important to remember that economic developments are not inherently good or bad. The impact of debt on the economy depends on a number of factors, including the interest rate, the level of economic growth, and the government's ability to manage its finances. Markets tend to recognize these factors before we do.

Allocation

Looking at Lipper Holdings database we see the Mixed Asset Fund Managers have increased their exposure to equities since the market bottom. But hardly near the high back in 2021. They have actually cut the allocation in the past quarter

Thoughts on Inflation

Inflation is a bit like a snake swallowing a mouse – it slowly works its way through the system. It all starts with prices going up, which then affects our wages, eventually helping us get back to our usual standard of living without prices dropping. This also helps businesses keep their profits steady.

I know, it's not exactly a fun ride. It might take a couple of years before people begin to feel like they have more purchasing power again, but this gradual approach is far more preferable than enduring a severe recession, which would likely be required to bring price levels back down. Such a recession would likely result in widespread unemployment and a host of other negative consequences.

So, going for modest GDP growth, slower inflation, and higher wages is probably the smarter move in the end.

Q4 Outlook & beyond.

I think September acted as it seasonally does and October can also follow. I don’t see much progress this month if oil, interest rates and the dollar remain strong. However, I do expect a Q4 rally will cause the market to end the year closer to all time highs if not exceed them (because no one is expecting that)... some reasons include inflation will continue to subside, earnings will improve and the bull market will climb the wall of worry...

Now for 2024 – you will read more about it later this year but I would assume based on a few factors Election Year being the primary driver. H1 might be challenging but give opportunities to make profitable trades.

But remember, It is always a good time to check your allocations are aligned with your goals. Adopting a long-term perspective, avoiding common mistakes, and taking appropriate actions in portfolios, investors can navigate the market's ups and downs with confidence and capitalize on potential opportunities in the bullish market for the rest of 2023.

Thanks again for reading

Mate