Market Commentary February 2024

The “Energizer Bunny” stock market seems to have a lot of juice left, as the major US indices power to new all-time highs. Each day and each week, the market goes up and the rubber band is stretched further and further. Since the low of 27th October, the S&P 500 has soared almost 20%. Generally, gains like these occur during the early stages of a bull market. The 14-week RSI (a momentum indicator) hit 72% in late January, indicating the market is overbought. Just because we are overbought though does not necessarily mean stocks are necessarily approaching a top. In most cases, the market eventually pauses only to continue moving higher.

Market Commentary January 2024

We wish all our clients and readers a very Happy New Year. John Bogle, the founder of index-tracking firm Vanguard, once said “Intelligent investors will use low-cost index funds to build a diversified portfolio of stocks and bonds, and they will stay the course. And they won’t be foolish enough to think they can consistently outsmart the market.” As we know, 2023 followed a nasty bear market in many stocks, especially in the Technology sector. Coming into the new year, investors generally were bearish and not loaded with tech stocks. Well, if you just owned the S&P 500, you have done quite well. But the 71% of stocks in the S&P 500 have underperformed the index, with most of the gains coming from a few tech giants. While Mr Bogle has probably rolled over in his grave based on the concentration of returns this year, his simple advice worked again.

Market Commentary December 2023

During various recovery spurts, the one thing that has been consistently lacking in this market has been breadth. A handful of AI superhero stocks cannot carry the market forever. Since making its recent lows in the 4,120s at the end of October, the S&P 500 has bounced back strongly. Are we finally seeing signals of better breadth, at least on a short-term basis? One month ago, just 33% of US stocks were trading above their 20-day simple moving average (SMA) trendline. That percentage has moved up to 65%. Short-term SMAs can be unreliable and tend to flap like a pennant in the breeze based on the market mood. While the 20-day breadth trend is encouraging, the market has a long way to go before establishing sufficient longterm breadth to signal that this advance has staying power.

Market Commentary November 2023

In November 2022, the launch of the popular artificial intelligence (“AI”) app, ChatGPT, made generative AI applications available to a large public audience. There are multiple applications of AI in the real world, with varying degrees of capability. Machines may never get to human-like self-awareness, but generative AIs are getting better and better at cognition, which is the ability to incorporate past actions and learning experiences into future practices. AIs are now generating text, poems, research papers, drawings, and videos. In order to do all this, these models require to be fed vast amounts of data, which entails using a significant amount of computing power and thus energy. Digiconomist estimates that by 2027, worldwide AI-related electricity consumption could increase by 85 to 134 TWh annually. This would be comparable to the annual electricity needs of countries like the Netherlands, Argentina and Sweden. The potential growth highlights that we need to be very mindful about what we use AI for. It’s energy intensive, so we don’t want to put it in all kinds of things where we don’t actually need it.

Market Commentary October 2023

Government efforts to encourage and develop renewable energy resources have intensified in recent years. But multiple factors have simultaneously driven up demand and prices for traditional petroleumbased energy resources. These include OPEC production cuts, geopolitical turbulence in Eastern Europe and the sharp rise in interest rates which has driven up the cost of financing new renewables projects. To the surprise of economists who expected a recession based on rising interest rates, most major economies have avoided steep economic downturns. Indeed, many economies are growing faster than expected, resulting in rising demand for energy from consumers and businesses. Global efforts to get work-from home employees back to the office are contributing further to rising oil demand. This all adds up to surging petroleum demand in what was supposed to be by now a renewables world.

Market Commentary September 2023

August has seen the unwinding of the seven-month rally in technology and digital stocks that, to varying degrees, lifted equities across most sectors this year. Stocks often struggle in the summer; but usually that means they are lethargic, not heading notably lower. What caused stocks to give up big parts of their year-to-date gains? AI mania drove much of the stock rally in the first half of the year. And in any stock-market mania, unbridled enthusiasm gives way to second-guessing at some point. Consumers and businesses show few signs of spending fatigue, contributing to inflation’s persistence. We think the difficulty in getting inflation down to the 2% target level, along with some buyers’ remorse on AI mania, has prompted investors to take profits.

Market Commentary August 2023

Data on NYSE margin debt (borrowed funds from brokerage firms) has been an excellent indicator confirming bull and bear markets. It is based on monthly data, so there is a time lag, but it is impossible to catch the top or the bottom in any case. Margin debt bottomed at the end of 2022 and has crossed above its 10-month average for an intermediate-term to long-term buy signal. This reverses the sell signal from late 2021 (when its uptrend broke) and a confirming signal when it broke the 10-month at the end of January 2022. Prior buy signals for the S&P 500 were given in June 2020, July 2016, September 2012, July 2009, April 2003, May 1995, May 1991, December 1982, and June 1975. These were all good signals. Sell signals were produced in October 2018, August 2015, July 2011, Sept. 2007, October 2000, November 1987, November 1981, and April 1973. These were good as well, but the reading was late for the 1987 crash.

Market Commentary July 2023

Just like that, 2023 has reached the half-year mark. As the years pile up, each passing year seems to compress into a tighter timeframe, and 2022 feels like it was six weeks not six months ago; but that is a discussion for another time. The outlook at mid-year 2023 is certainly an improvement over that of mid-year 2022, when inflation was near 40-year highs and rising, the supply-chain crisis was raging, and the central banks were just getting started on their aggressive rate-hiking policies. The war in Ukraine was just a few months old, and China was still in its zero-tolerance phase of COVID-19 lockdowns. As July 2023 gets underway, the major central banks have largely completed their rate-hiking campaigns. The annual rate of change in inflation is about half the peak level reported in June 2022. Supply chains now appear to be normalizing. China has reopened; and Russia is surrendering ground in Ukraine.

Market Commentary June 2023

Attendees at a recent event celebrating the 50th anniversary of the Chartered Market Technicians Association in New York were asked to forecast how the S&P 500 would end the year. With the index drifting sideways for the past year, it’s not surprising that a majority expected the index to remain range bound between 3,750 and 4,250. This is one of the basic tenets of technical analysis: the trend is your friend, until it isn’t. It also is known as recency bias: what recently happened is expected to continue, as it is the freshest in the mind of most investors. The poll did tilt toward the bullish side, with 31% looking for a move on the SPX to above 4,500, while 11% were bearish. In our view, there are far too many mixed signals on which to lean (to on one side or the other), so we would not argue with the above poll. The bulls have had their chance and the bears have had their chance, and neither group is strong enough to break the tug of war.

Market Commentary May 2023

The odds are increasing for a potential recession in the second half of 2023. The banking system seems to be back on its feet after the Silicon Valley Bank collapse; but the implications for loan and credit availability are uncertain and could play out unpredictably in the coming months. For all that, the FTSE 100 is up 3% year-to-date. The stock market is of course anticipatory, and investors are looking past near-term challenges. Up ahead, they see the end of the Bank of England’s rate-hiking cycle, stabilisation and eventual reduction in inflation, and – hope springs eternal in – the BoE successfully navigating the economy into a soft landing.