Market Musings 100525: Still a bull market, or just dead cat bounce?

Market Musings 100525:
Still a bull market, or just dead cat bounce?

Video + Report this week:
INVESTMENT STRATEGY FOCUS MAY 2025 - Policy watching
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Summary

1. Translating soft data into hard: while US hard economic data are bound to worsen in the coming months given poor recent survey readings, financial markets will focus on policy direction and the potential for near-term trade deal announcements.

2. ECB continues to cut interest rates, easing euro financial conditions and supporting the economy. Two further cuts are expected in June and July to take the ECB deposit rate to 1.75%. The Fed should also cut twice this year, starting in Q3. Euro-based investors should move away from term deposits to higher-return asset classes.

3. US Treasury bond market is the biggest bully: the surge in the 10-year US Treasury yield from 4% to 4.5% in early April prompted a shift in President Trump’s policy direction, given the need for lower bond refinancing costs. We look for US 10-year yields to hit 4.0% in 3 months.

4. Expecting a weaker US dollar: weaker US growth, lower interest rates, and a rebalancing of capital flows back to Europe motivate our expectation for a weaker US dollar. Our new EUR/USD targets rise to USD 1.12 in 3 months and USD 1.15 in 12 months (per 1 euro).

5. Focus on Switzerland as a true safe haven: the Swiss franc and Swiss assets have performed strongly on the back of the surge in geopolitical risk. Our EUR/CHF 3- and 12-month targets are unchanged at 0.94 (value of one EUR), while Swiss stocks remain a good proxy for the European quality factor invested in Swiss francs.

Podcast:
INVESTMENT STRATEGY PODCAST - The 5% from 12-month highs system

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In this podcast, Edmund Shing, Global Chief Investment Officer, BNP Paribas Wealth Management, explains a simple investing system that investors can execute themselves on a monthly basis and which has very encouraging long-term results.

Are stocks hanging on to a bull market trend, or is it over?

Global stocks have been in a bull market since late 2022, judging by the advances seen in US and European stock market indices. Emerging market stocks have only more recently joined the bull market party, judging for instance by the rebound in key Chinese stock markets since September last year.

The correction in the US stock market since the beginning of the year, with a recent drop from peak to trough of 20% in the S&P 500 index, questions this ongoing bull market trend, at least in US stocks.

S&P 500 index: reclaimed 200-day moving average, now what?

Judging by Friday's close, the S&P 500 index and indeed the NASDAQ 100 tech heavy index have both reclaimed their 200 day moving averages, in the process retracing 50% of the previous drop from peak.

The key impulse behind this rebound has been retail buying with individual investors buying the dip aggressively over the last couple of weeks according to flow data from EPFR and from US investment banks such as JP Morgan.This is unsurprising given that the "buy the dip” strategy has worked so well for US investors since 2009.

However as with all strategies, this can work until it no longer works. The onset of a bear market would change this behaviour from "buy the dip "to "self the rip". The $60,000 question then is: are we still in a bull market where a buy the dip strategy can still work, or have we went to the bear market, where one should sell into rebounds, as they usually precede further stock market falls.

For my part, I suspect that US stocks may creep higher in the weeks to come, on the back of potentially more comforting news on the US trade deal front following the outline agreement reached this week with the UK.  

There are a number of indicators to watch to confirm whether US stocks can continue to rebound or not. I like to watch the retracement lower in the VIX volatility index as one potential confirmation of a further stock recovery. If the VIX can dip below 20 in the coming days, then that would augur well for US stocks.

Here, we should differentiate clearly between behaviour in the US stock market on the one hand, and in the rest of the world on the other.Major market outside of the US such as the UK, Euro zone, Japan and China remain well above their own 200-day moving averages and show a rising trend in each case, underlining an ongoing bull market phase in each case.

World ex US stocks well above their own 200-day moving average (in Euros as well as in USD)

However, if the US stock marketHas transformed from a bull market phase to a bear market phase, which would be unsurprising given the rising risk of economic recession in the coming months, then we would not expect stock markets outside of the USTo continue to rise.

Alternative lower-risk asset classes are now less attractive

The issue for conservative investors todayIs that both interest rates on cash deposits and bonds are falling.In essence, the return on lower risk gas classes such as cash and bondsIs coming down once again after rising sharply between 2021 and 2022.In Europe the ECB has just cut it benchmark deposit rateTo 2.25%, and in the UK the Bank of England has also just cut it based lending rate to 4.25%.

In each case, central bank Interest rates are likely to fall further in the coming months.Cash deposits will therefore yield less, and at the same time there is potentially also downward pressure on bond yields. Thus the potential future return from bonds is likely to be lower in future than it is today.

This is likely to put pressure on investors to search for higher returns in risky asset classes. This was the case In the years following the 2008 global financial crisis, when benchmark interest rates and bond yields slumped either close to 0 or even below zero in some cases.

Sustained bull market trends in stocks outside the US

In Europe, the two sectors with the strongest upwards momentum remain banks and insurance, both financial sectors.Both sectors have demonstrated very resilient results over Q1 2025 in earnings terms, outperforming analyst expectations in general. In addition, these two sectors offer relatively generous dividend yields of over 5% on average.

It is in large part for this reason that dividend strategies within Europe are performing well this year. Take for example the Amundi MSCI Europe high dividend ETF, composed of high dividend yielding stocks in Europe drawn from a number of sectors including of course these financial sectors.

The MSCI Europe high dividend yield index offers a 5.1% dividend yield at present, far in excess of the yields on offer from long-term bonds in the UK (4.6%) and the eurozone (2.6% in Germany). For this year to date, this high dividend yield stock ETF has delivered a 9% return.

Amundi MSCI Europe High Dividend Yield ETF: +9% this year so far

Finally, keep an eye out for European small-caps (in reality, they are rather mid-caps), which are starting to outperform large-caps after a long period of under-performance post 2022. These small-caps trade 30% cheaper than large-caps on a P/E valuation basis, which is a very wide valuation discount by historical standards.

Have a great week,

Edmund