Market Musings 220325: Just A Correction, Or A Bear Growling?

22nd Mar by Edmund Shing

15 comments 1774 reads

Market Musings 220325:
Just a correction, or a bear growling?

Podcast this week:
Extreme US bearish sentiment marks a tactical turning point
(click on link to listen)

Edmund Shing, Global Chief Investment Officer at BNP Paribas Wealth Management, discusses the bearish sentiment among US investors and the possible implications for future returns from US stocks.

Poking the bear?

The Trump presidency has certainly set the proverbial cat amongst the pigeons. Since inauguration on 20 January, Donald Trump has unleashed a maelstrom of Executive Orders that have created a record amount of geopolitical uncertainty in just 2 months.

The Economic Policy Uncertainty index published by Baker, Bloom & Davis illustrates just how extremely unpredictable the US and global geopolitical landscape has become, following a flurry of announcements regarding tariffs, the Department of Government Efficiency, NATO and the war in Ukraine.

According to the US version of this index, uncertainty today is higher than at any time bar the beginning of the COVID pandemic in early 2020.

Record surge in US economic policy uncertainty

AD_4nXf9LT4M-Y3FVIHDabsSA8-qzZaI-1fR8HyOvIM6cxnn0ayhkc1036AuwQ9gMVGkanNCcqoeLVHCpjnAvxK55TmWMw5jr2E4rhfTdxJz-HMCRtfU1vt5YTRz8Futxlw6s6sZ9xsSow?key=vIOBHHV_Y60haCydFff6Cmob

Source: www.policyuncertainty.com

The result of this extreme unpredictability in US economic and foreign policy has been a plunge in the level of confidence of both consumers and businesses, as measured by recent surveys.

AD_4nXesUauuAKROg0hNOg7to3vCLV4-qB7RsdSMJoOP7lSXPhxAsP3BMcfqLbJz8Tsz6Ye4jkvmHc5lgeD2nsnZKYWNFRu8NCxzXug1E4OI0wTjUVM2Zo24ipudpTj2r6FaXpCVlXKlGA?key=vIOBHHV_Y60haCydFff6Cmob

This plunge in confidence is beginning to weigh on both consumer spending and business investment, and thus on US economic growth prospects. This weakening growth outlook has transmitted to the US stock market, with an interruption in the bull market in place since late 2022. From mid-February peak, the S&P 500 index has fallen 8% and the Nasdaq 100 11% to date.

US stocks suffer from this collective loss of confidence

AD_4nXdKArsX9YB_C8exxzPAGS2ntXTG9HhmpqOXpxPvUGehdmfESDyqmNK_fJqiKm3IhWqgabcvEsvnN9XXRq6-MsWbqA-RYalMQYdcYcsU3_rj1Gs6tItH1vtuOPqZvTkSqSMfwiR8IQ?key=vIOBHHV_Y60haCydFff6Cmob

This still leaves the S&P 500 58% higher than its trough in September 2022, but it does sit below its 200-day moving average for the first time since late 2023. Back then, this breach of the moving average was quickly reversed. Time will tell as to whether the S&P 500 has rebound above this key moving average. If not, then we have to conclude that the current US bull market may have ended, and that a new bear market may have begun.

Unlock with Email

Unlock with Google

Already have an account?
Login here

Funderstruck

22nd Mar

Thanks Edmund for another extremely interesting article relating a singular indicator to Investor sentiment but then being put in perspective by the reaction of the S&P. Rather emphasises the need to be rather simple in ones approach to gauging Market / Economic directions, particularly as one rarely follows the other.

On another of your very interesting articles relating to Longer term Model ETF's; i had hoped , this week, you would have published your work on this for your friend, as mentioned last week , but possibly i missed it if published elsewhere..

There were quite a number of thumbs up so a lot of interest. I do understand that Stockopedia is geared to direct equity investing but i do mine in two halves ,with one long term in stocks and funds ,the other more shorter term for which Stocko is essential.

Tommy H

Hi Founderstruck

Edmund has a great book, it's called "The Idle Investor" it is worth the time to read it, I just wish that I could find my copy of it to read again.

Cheers

Tommy

SJRen

True.... I read a copy from my local library.

23rd Mar

Thanks Tommy H, now on order.

Epitychia

The market is about psychology. The 2008 recession was a long time ago, People are used to markets rising, which means they are reluctant to sell.

My guess is that it needs another two months of falling markets for investors to get weary and start selling in large numbers. Only at this point will a significant bear market commence.

Alternatively if Trump stops his manic policies in the next two months there is no reason for a recession. But on past experience he cannot help himself. So yes i think there will be a major slump this year.

snowdrop

Japan: you say, as do many, 'We could equally look to Japan: Japanese stocks may have stalled since mid-2024, but again remain solidly above their 200-day moving average and have provided handsome returns to investors since mid-2022. The Japanese TOPIX index sits only 4% below its all-time high.

Yet the AIC charts for Jap IT funds show dismal performance for the last year (apart from one). So is currency the problem? Do you need to buy a hedged etf? Can some expert tell me the truth about investing in Japan because I have never got it right. And have given up atm.

The Phoenix

Seconded here Edmund would be great if you got time to finish off the second part of your previous ETF article.

Currency is the issue Snowdrop Japan funds did well in 2023 but when converted back to sterling/gbp you made about half the gains shown from holding in yen, that said if the yen is now in a period of rising it could move in the investors favour.

Edmund Shing

25th Mar

Dont worry, it is coming soon. I needed to put the explanation of the High Yield credit spread as an indicator in this article, as I will refer to it again in the next articleon an ETF investing system...

Indded, historically the way to avoid this would have been to invest in currency-hedged Japan equity ETFs... But given that the yen may finally strengthen from here, I am not sure that is any great idea any longer. So the ITs should perform better on the back of a Japanese yen no longer weakening significantly

This is as always the risk, that we follow the pattern of early 2022 once again and see a 10% drop in the S&P 500 turn into a 23% drop before finally bottoming ion October 2022... As I said, depends largely on Trump...

Dont worry it is coming, but needed the credit spread explanation first as I will use this as part of the system!

Thanks Ed I have just ordered your "idle investor book" I'm moving out of buying direct equities as although I work in the finance industry with access to loads of fund managers I'm not averaging much better annual performance than putting the whole pot into Rathbones Global Opps.

So I'm hoping a tracker ETF portfolio along the lines of what you outlined in your previous article might be a simple/better way less time consuming way to go moving forward.

Someone once said "its easier to make it as an Olympic athlete than beat the stock market consistently" and even though I put in 15-10 hours per week research and have access to the top managers after 15 years effort I still haven't cracked it.

So hopefully your ETF portfolio approach will grind out 8-10% per annum most years and I can put the sixty odds hours a month saved into something I'm more suited to.

Regards

Andy

sam viskovic

26th Mar

deleted

ShoeShineBoy

29th Mar

Thanks for posting your thoughts Edmund and also for the podcasts. They are short, straightforward, based on facts and easy to follow the logic.

I tend to focus on quality shares and investment trusts trading at a discount to NAV. I find the number of ETFs overwhelming! Although, maybe if I spent the same amount of time reviewing ETFs, I would have a better understanding of relative performance.

Largest ETFs: Top 100 ETFs By Assets

List of top ETFs & ETCs | Hargreaves Lansdown

I should perhaps spend more time as my defined contribution pensions funds are invested in very similar investment vehicles.

I thought the following substack article by Stephen Clapham was interesting.

https://tinyurl.com/bdz42z4x

The growth of ETFs has been extraordinary:

And it's no wonder when you think about the underperformance of actively managed funds:

SSB

Market Musings 220325: Just a correction, or a bear growling?