Rudi's View | May 10 2023
By Rudi Filapek-Vandyck, Editor
All is not what it appears to be, in particular not in financial markets today.
At face value, it seems US equities are well and truly on their way to wiping out last year's negative performance with the S&P500 gaining 7.7% and the Nasdaq recovering by nearly 17% since January 1st.
Both strong numbers suggest US equities are back on track to seemingly doing what they do best: outperforming most of the rest of the world, including the Australian share market, while climbing the proverbial Wall of Worry.
But look under the hood and virtually all those gains stem from a small group of index heavyweights only. Unless investors own an index tracking ETF, missing out on one or two of the world's largest companies means the year-to-date experience probably looks a whole lot less positive.
Which opens up the logical debate: is the US really outperforming when it's done through a handful of megacaps only? With large swathes of US equities deep under water still, it can just as easily be argued last year's bear market is still alive and rolling on.
To add a little more juice to that latter argument, consider small caps in the US are still trading in negative territory year-to-date, as well as from twelve months ago, and so are all kinds of micro-cap measurements as published by index provider Dow Jones.
In contrast, the situation in Australia has been a lot easier to navigate for investors. As I explained early last month (see: https://www.fnarena.com/index.php/2023/04/12/rudis-view-wesfarmers-wisetech-worley/ ), small caps and micro-cap stocks in Australia are equally still waiting for liquidity to return, but at least most large caps on the ASX are participating in this year's positive trend.
It's not difficult to back up those observations with some real-life stats: since January 1, the ASX200 is up 2.5% (week ending May 5), but those gains stand despite banks losing -7% and the energy sector trading more than -5% lower.
Admittedly, most income-hungry investors do own bank shares, likely more than they should, which makes these observations rather subjective, I agree.
One tool that is available to avoid your typical index-related shenanigans is to look at equal-weighted indices. S&P Dow Jones has one each for the US and the Australian market. The first one is up 1.19% year-to-date and down -3.64% over twelve months. The second one is only down -2.62% from a year ago and up 4.84% since the start of 2023.
Take away the "perception" and it can just as easily be argued Australia is winning the race thus far in 2023.
Equally worth highlighting: if it wasn't for a solid rally on Friday, US equities without the skew of a few megacaps wouldn't even be up for the year to date.
Just goes to show the all-importance of face value appearances, and how they guide our views and conclusions.
Head Up/Head Down
As is typical at these market junctures, human eyes are inclined to see what they want to see.
With uncertainty dominating and markets in general showing more resilience than many had expected, one of the popular chartist views on equities is that indices are forming a so-called Head-and-Shoulders formation, which, if confirmed, serves as a precursor to the next wave of selling, taking indices possibly down to last year's low.
Of course, that is one possibility and those who pay religious attention remain on alert. The other possibility is indices can equally still carve out a so-called inverse Head-and-Shoulders, which is the same formation but upside down, and this would be a very positive signal, if it comes to pass.
Take your pick, which is not unusual given the time of the year, the many opposing narratives and market forces, and the variety in scenarios that still lay on the table for the quarters ahead.
A Crisis To Bank On?
One thing that has had me puzzled recently is the resilience shown by US markets.
Not only has the prospect of economic recession not suddenly evaporated (I still see quite the number of economists insisting their modeling continues to point towards negative GDP growth) but the USA is also, yet again, facing another nasty banking crisis.
According to some expert insights on the sector, nearly half of the country's 4800 banks have by now burnt through their capital buffers and are running on negative equity.
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