Stocks rallied last week despite poor earnings reports from the big technology companies.
The market is going up in the face of a deteriorating economic situation and still high valuations because:
1. Central banks are becoming more worried about growth. “Australia, Canada and now Europe are … beginning to consider a slowdown in the pace of hikes and most likely a complete pause relatively soon,” notes Alfonso Peccatiello on the Macro Compass.
2. Positioning is light. Hedge funds and mutual funds hold a lot of cash. Their managers are worried about missing any rally after a bad year, especially into the year end.
3. “High excess savings and strong employment mean individual investors can sit on their losses and wait for better days ahead rather than capitulating,” notes Barclays Capital.
4. Political stabilisation in the UK and an improving energy situation in Europe have removed tail risks from investors’ minds.
It is unlikely that this bear market has ended, however.
When will the next down leg come? Morgan Stanley’s Mike Wilson argues it will be in Q1 2023,
Like Wilson and Stifel, we view the current market action as a tactical rally and believe that the final destination for the $SPX500 is 3000.
In addition, like Stifel, we see a lost decade ahead for stocks. Active management, Value stocks ($VTV) and a macro-driven approach will be required to produce excess returns during this decade, in our view, while the winners of the past, such as technology stocks ($XLK) and cryptos ($BTC), will struggle.