Has The 2023 Stock Rally Lost Momentum?

TPP Market Update:

Has this years global stock rally lost momentum?

A gauge of global equities has faltered after its best start to a year in a generation as investors assess whether the rally has gone too far given the outlook for inflation, growth and earnings. European stocks rose modestly again, although they too look like they might have gone too far.

The MSCI ACWI Index slipped for the first time in seven days on Monday after posting the biggest advance for the first two weeks in data going back to 1988. Futures on the S&P 500 and Nasdaq 100 indexes fell at least 0.2% each and finished yesterday fairly flat. The dollar also snapped a three-day losing streak implying risk on sentiment has paused for now.

While inflation in the US appears to have peaked, aggressive policy tightening by the Federal Reserve and other central banks risks pushing the global economy into a recession that could hurt corporate profits. The World Bank last week added to the gloomy outlook, warning of “one of the sharpest slowdowns we have seen in the past five decades.”

“The fear of missing out currently represents a key driver for equities,” Credit Agricole CIB strategists led by Jean-François Paren wrote in a note. “The market is getting a bit ahead of itself right now.”

Earnings will be a key catalyst moving forward as traders assess whether companies were able to navigate headwinds including higher interest rates.

A host of Fed officials have been speaking this week, providing more clues for investors. The World Economic Forum’s annual meeting kicked off in Davos, Switzerland, with speakers there including European Central Bank President Christine Lagarde and the International Monetary Fund’s Kristalina Georgieva.

Bitcoin has made an incredible start to the year, but then arguably it’s more volatile and slipped more last year than most stocks. However, even that rally seems to have paused for now.

Where can stocks go from here after such a good start to the year?

That really is a tough call. The reason for European stocks to have rallied so much over the last month can only really be put down to repositioning. We’ve been saying for a while that the FTSE and the DAX in Germany have been too cheap compared to peers.

However, now it is now harder to find bargains especially considering the grim outlook for the global economy.

PwC's global CEO survey, which polled 4,410 CEOs in 105 countries and territories in October and November 2022, found that 73% of CEOs believed global economic growth will decline over the next twelve months. The survey was released as the World Economic Forum kicks off.

"The bleak CEO outlook is the most pessimistic CEOs have been regarding global economic growth since we began asking this question 12 years ago and is a significant departure from the optimistic outlooks of 2021 and 2022, when more than two-thirds (76% and 77%, respectively) thought economic growth would improve," PwC stated in a press release.

Inflation, macroeconomic volatility, and geopolitical conflict ranked as the top threats to businesses. Nearly 40% of CEOs surveyed didn't believe their organizations will be economically viable in 10 years if they do not transform.

Then yesterday we got Q4 results from Goldman Sachs. Goldman’s shares slumped as much as 4.3% after it reported that investment banking fees dropped by almost half during the last three months of 2022 from a year earlier, and the backlog of new business shrank compared with the third quarter.

At the same time costs jumped, driven by compensation, and the New York-based bank earmarked more funds to cover loans that might go sour. That left net income down 69% from a year earlier on a 16% drop in revenue, the company said in a Tuesday statement.

Things are definitely looking bleak and the start to earnings season has been poor, yet stocks have rallied.

This morning we also heard that JPMorgan’s Marko Kolanovic cut his recommended equity allocation again due to recession risks and concern central banks may tighten too much.

He’s especially negative on the euro area, given its recent outperformance, while staying overweight on EM and Chinese equities. That’s a change from one of Wall Street’s biggest optimists through most of the market selloff last year.

THIS IS NOT BAD NEWS FOR THE PORTFOLIO PLATFORM. This is what we do.

The Portfolio Platform current positioning:

For TPP, it has been a mixed start to the year. Most of our traders were long the first week of Jan, however we have recently seen many of the more active strategies go short the market. This means if it drops from here, they will have made money on the way up, and they’ll make more on the way down.

Many of our long or flat strategies are flat, or only very slightly long having enjoyed a good week or two. A drop from here would be beneficial for all portfolios, but if it doesn’t happen, positions are easily changed and our traders may look for more gains to the upside.

Patience is a virtue in trading; waiting for a market fall can feel like an eternity, but when it happens, it can happen fast.  The markets always fall faster than they climb.

If you haven’t pushed the button on your TPP portfolio yet, maybe now is the time. Economic outlook is poor, yet stocks are higher? This could be a good time to be short but only time will tell.

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