Are Markets Recovering? A Closer Look

News about market movements in financial publications have been rather positive in the year so far. This might lead retail investors to believe that the risk factors for the downside have decreased and its the return of the bull market that lasted nearly 5 years before the pandemic became global (and for a short while after movement restrictions were lifted in kay areas of the Western Hemisphere). However, an enthusiastic return to bullish estimations might be premature.

Mr. Jurrien Timmer, Fidelity’s Director of Global Macro, estimated that in the year till date, margins seem to be bearing the brunt of the earnings estimate downgrades, thus falling from 13.7% to 12.2%. Even present-day valuations are being deemed as being high by historical standards, and well above the pre-COVID peak over the past fifteen years.

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Mr. Timmer further elucidated that while US earnings estimates are coming down hard, the rest of the world seems to be stabilizing. In year-over-year change in forward estimates, Emerging Markets (EM) stocks had earlier been at the bottom of the pack and are now flattening out.

This is by no means is a minority opinion. As the article from nearly two weeks ago highlighted, most leading analysts posit that India will lead the pack of EM instruments that will do well in this year.

The deflation of US stock valuation is quite an interesting turn of events. Historically, US equities have been the most overvalued stocks in the world, which was achieved in no small part by strong „brand recall“ among investors worldwide due to the large volumes of media output about them. Charles Schwab estimates that the projected returns over the next ten years is showing a bearish tendency with at least some signs of a deflation in the 10-year forecast in the estimates made last year versus the current.

Belying any expectations of a recovery have been the downsizing actions of the US economy. New data gives some insight into why the unemployment numbers published don’t seem to add up relative to other economic indicators: small businesses have been holding up the labour market by hiring 3.67 million more people than have been laid off or who quit since February 2020.

However, unlike larger businesses, small businesses are far more susceptible to rising costs and inflationary cycles. AllianceBernstein estimates that inflationary pressure will likely remain high at least for the current quarter, with the US GDP showing nearly no growth and US monetary policy expected to remain tight throughout the year.

China, too, is estimated to have a drop in consumption and investments relative to historical trends – although it won’t be quite as drastic as seen in the earlier part of 2022.

So what explains the mildly positive market valuation in the year so far? Well, outside of the little-understood „January Effect“ (which was discussed last week), there is at least one other factor: money market fund inflows. Investors have added nearly $135 billion to global money-market funds (MMFs) in the four weeks between mid-December 2022 till mid-January of this year, estimated to have been the best period for money-market funds since the 4-week period that ended in May 2020.

Throughout 2022, retail investors abandoned U.S. equity markets and cashed out rather than continue to hold sky-high convictions in popular stocks. As 2023 dawned, however, the MMF data indicates the quiet resurgence of the institutional professional reaffirming their dominance in determining market investment trajectories. Given that MMFs are required to create positions in accordance with clients investing into their funds, it stands to reason that this purchasing activity imparted some momentum to the U.S. equity market, despite the neutral-to-bearish macroeconomic outlook.

Assets sitting in money-market funds hit a record $5.18 trillion in December, surpassing the previous high of $5.16 trillion in May 2020. The average return on U.S. money-market funds this month (until the 23rd of January) is 4.12%, the highest yield since the 2008 Global Financial Crisis.

Just as with the previous week’s article, the base takeaway remains unchanged: current conditions seem to be optimal for realizing short-term profits from tactical trading, which Exchange-Traded Products (ETPs) are perfectly poised to deliver at very economical and scalable costs. Learn more about Exchange Traded Products that provide magnified exposure on either the upside or the downside of major markets, sectors and investor-favourite stocks here.

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