Rudi's View | Apr 21 2022
In this week's Weekly Insights:
-Market Sentiment And Warning Signals
-What's With Liquidity?
By Rudi Filapek-Vandyck, Editor FNArena
Market Sentiment And Warning Signals
Are we witnessing a glaring disconnect between unbridled share market optimism and deteriorating market fundamentals?
Yes, say market strategists at Bank of America, whose April survey of global funds managers revealed overall anxiety about deteriorating growth, potentially resulting in 1970s style of stagflation, and has not been this high since August 2008, when the GFC bear market was about to take yet another major tumble downwards.
Actually, the April survey showed optimism regarding global growth has by now sunk to an all-time low with survey data going back all the way to 1994.
Traditionally when sentiment sinks this low it is treated as a Buy-signal by the strategists, but not this time. This time, suggest BofA strategists, investors should treat the disconnect in equities as an opportunity to lighten up and take risk off the table.
In institutional lingo this becomes "Sell the rallies" with the strategists describing the opening weeks of the calendar year as merely the "appetizer not main course of 2022".
Not everybody is on board with the BofA view, of course, how else to explain the swift recovery that occurred in March, giving the ASX the chance to outperform on the global stage.
But there is growing sympathy for the view elsewhere. The strategy team at Morgan Stanley has been warning for a while that corporate profits will come under pressure in the US, though this is not yet visible in market forecasts.
Morgan Stanley's team led by Mike Wilson pointed out last week the breadth that carries US corporate profit growth is narrowing, and has been narrowing for a while.
Wilson & co believe the current reporting season is when revisions to profit forecasts in the US will turn negative, which, if history can be relied upon, will take the steam out of US markets' momentum.
Digging deeper through in-house data and indicators, the strategists believe the market looks poised to retreat to 4000 (S&P500) from its current level of circa 4400.
All eyes on the US corporate results season thus, as it might turn out a whole lot more important than has been the case over the past two years.
US strategists at Citi are equally issuing more cautious views and research this month.
Citi's Panic/Eurphoria index, re-labeled as Levkovich index in memoriam of the deceased, well-respected market strategist, has now risen into Euphoria territory. History shows this index can move a lot further into Euphoria, but nevertheless, Citi reports the current index level suggests a 27% probability of a positive return over the next twelve months.
Everyone with an eye on the missing 73% in that statistic can understand why Citi strategists are turning more cautious. Though they are, as yet, not as convinced as are the colleagues at Morgan Stanley, that US corporate profit revisions stand ready to provide a wake-up call to investors.
What caught my eye is Citi's proprietary Bear Market Checklist, always widely reported on when market observers need an independent tool for confirmation the outlook remains rosy. This time around, Citi's checklist has 45% of items in the red, at least calling for caution.
In Citi's own experience, it remains too early to genuinely become worried until 50% of the checklist is in the red or flashing yellow (caution), which currently is not the case. But the checklist consists of 20 items only and thus further deterioration in 1 or 2 additional items might push total warning signs past 50%.
An inverted US bond curve, in combination with widening high yield credit spreads, would do exactly that.
Citi has a year-end target for the S&P500 of 4700 and the strategists take it as a positive the index has now pulled back after reaching that level late last year. Another positive is seen in the fact that earnings forecasts in the US have thus far proven to be remarkably resilient.
The offset is that historical analysis by Morgan Stanley suggests share prices will likely start trending south before analysts get busy lowering their forecasts.
For what it's worth, JP Morgan's global markets strategy team led by Marko Kolanovic has been among the most bullish this year, and there the decision was made to take profits, but to remain bullish nevertheless.
JP Morgan has redirected its bullish view towards Emerging Markets and commodities and energy. Its year-end target for the S&P500 is 4900, down from 5050 prior.
It is Kolanovic & co's view that strength in commodities will persist, whereas the speculative parts of markets have already tanked, while geopolitical risk is expected to subside.
The overall negative sentiment, as also expressed in this month's BofA global survey, is seen as yet more evidence the path of least resistance remains up.
For further reading, recent Weekly Insights updates:
Real Market Support Is Invisible:
Preparing For August:
What's With Liquidity?
When market strategists make forecasts, it usually is based on the predicted pace of growth, combined with factors such as inflation, interest rates and the likely valuation (i.e. market multiple) investors might be prepared to pay for corporate profits.
But what about liquidity?