Stocks fell for a seventh week in a row, briefly entering a bear market on Friday.
We hold a positive near-term outlook on the market despite this relentless selling because:
1. Investor sentiment is at rock-bottom levels. Bank of America’s closely-watched Bull & Bear sentiment indicator gave an “unambiguous” buy signal last week. The indicator has a good historical track record of timing market bottoms.
2. According to Goldman Sachs, retail traders have sold 50% of what they purchased in 2020-2021. Retail traders are generally thought to be a contrarian indicator, as they tend to be buy after rallies and sell after declines.
3. We do not expect a recession this year. This is because the quantitative models we follow do not flash warning signals as of yet.
In our view, market sentiment has now turned too negative. News stories mentioning the word “recession” have become more frequent in the media, which is a contrarian indicator. At the same time, inflation may be about to peak, which could provide temporary relief for stocks and bonds.
As a result of our positive near-term outlook, the portfolio currently has a risk-on bias. We hold banks ($LLOY.L (Lloyd’s Banking Group PLC), $SAN.MC (Banco Santander SA), $BAC (Bank of America Corp), $KB (KB Financial Group Inc)), capital market players ($EQH (Equitable Holdings Inc.), $IBKR (Interactive Brokers Group), $AMUN.PA (Amundi SA)), Energy companies ($BP.L (BP), $SHEL (Shell PLS (ADR))), and oversold Real Estate ($VNA.DE (Vonovia SE), $BDEV.L (Barratt Developments), $STOR (Store Capital Corp.), $EQR (Equity Residential)). The portfolio is not quite 100% risk-on, though, as there are also a few less cyclical names ($DTE.DE (Deutsche Telekom AG), $SAN.PA (Sanofi), $BAYN.DE (Bayer AG)) in it.
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$CAPC.L (Capital & Counties Properties PLC) was replaced by $VNA.DE .