Market Musings 230825: Breakouts galore!

Market Musings 230825: Breakouts galore!

As the summer holidays draw to a close for me this year (back to work on Monday), August (so far) has been a surprisingly strong month for global stocks and certain commodities. A word of caution, however. September is seasonally the weakest month of the year for stocks, so a correction may be close at hand.

Jerome Powell at the Fed delivers a dovish surprise

The one notable conclusion to draw from Chairman Powell’s speech at the Fed’s annual get-together of central bankers at Jackson Hole, Wyoming this year was a downplaying of the Fed’s 2% inflation target in favour of supporting full employment in the US economy.

This suggests that the Fed is leaning towards President Trump’s desire for lower US interest rates (the Fed Funds rate) to boost US growth. One might also conclude that US inflation may continue to run at well above 2% for the foreseeable future. After all, US CPI has already run consistently above 2% for the last 52 months in a row (over 4 years).

In my view, this favours investment in real assets that can hedge against inflation, such as real estate, inflation-linked bonds, infrastructure assets and commodities.

But is a growth bubble forming in US stocks?

The famed investor Howard Marks (founder of investment firm Oaktree) has warned this week of a bubble brewing in US stocks. This is evident in the investor euphoria over a number of growth-related investment themes dominating the US stock market at present, including of course Artificial Intelligence, quantum computing, SPACS (Special Purpose Acquisition Vehicles), small modular reactors in nuclear power, cryptocurrency treasury stocks such as Strategy, amongst others.

US stock valuations for the largest companies are very high compared to history, while US retail investors have taken on more margin debt to buy stocks than ever before. In addition, retail investor buying of zero-day (ultra short-term) options and leveraged ETFs has exploded as investors look for ways to leverage up their gains in the current bull market. Moreover, in aggregate US households are now more exposed to stocks in their net financial worth than ever before, at 44% of their total net financial assets.

Since April, US stocks have enjoyed a huge comeback following Trump’s Liberation Day tariff shock, up 30% from the April low. So perhaps at this point, some caution is warranted in the short term given the S&P 500’s elevated P/E valuation of 23x, at the top end of the long-term historical range.

Plenty of stock market breakouts in the World ex US

For investors who want to invest in stocks outside of the US, there are plenty of choices in markets that are breaking out to new multi-year or all-time highs. As a reminder, over 2025 to date the S&P 500 has gained 10% in US dollars, while the World ex US has gained 23% in USD.

Below I list a number of countries and regions that show multi-year breakouts in the last couple of weeks:

• UK: FTSE 100 - led by Banks and Mining

• Europe: Spain (IBEX 35), Italy (FTSE MIB), Belgium (BEL20), Greece

• Europe Mid-/Small-Caps

• Europe Financials: Banks, Insurance

• Japan: TOPIX index, hedged ETFs

• China: Shanghai Composite index, China Tech

• Emerging Markets ex China

• Mexico

• Canada

• Vietnam

• Singapore

In addition to this geographical list, we can list a number of themes and sectors outside of Tech/AI that are also performing well:

• Battery value chain

• Solar power

• Copper miners

• Rare Earth Metals

• Precious metals miners (gold, silver)

• European infrastructure

• European Oil & Gas

• US inflation beneficiaries

• Robotics and Automation

• Airlines

Selected Weekly Charts

Please see below a selection of charts relating to some of these ideas:

World ex US: EXCS

Europe (inc. UK) Financials: ESIF

Europe Mid-Caps: EMID

Japan: IJPE, IJPH (hedged ETFs)

Canada: CSCA

Mexico: XMEX

Robotics & Automation: RBOT

Battery value chain: BATT

Copper miners: COPX

Gold miners (GDGB), Silver Miners (SILG)

Have a great week ahead (not sure I will given that I will be back to work),

Edmund