The market rallied last week despite many reasons why it should continue to fall.
The economy is decelerating, liquidity is falling, interest rates are going up and stocks are expensive.
What can explain the market’s recent resilience?
As Christopher Yates argues on Seeking Alpha,
the negatives are being balanced out by positives for the moment.
Investors have turned pessimistic and are holding more cash than usual. This is a contrarian signal – it is often a good time to buy when others are pessimistic.
Market internals remain constructive – cyclical (economically sensitive) groups are holding up well. If the market was really concerned about the health of the economy, you would expect to see cyclical stocks underperform. This is not happening, so the collective wisdom of market participants suggests that the economy remains healthy for now.
Seasonality is positive, as the market tends to gain from mid-March to the end of April.
Putting all these reasons together, and given the strong market action last week, we decided to increase the risk level of the portfolio. We still expect the market to fall in 2023, but see scope for near-term strength over the next 1-2 months, before weakness emerges after the China reopening story has played out and central banks’ tighter monetary policies hit the markets with full force.
2023 performance YTD
British American Tobacco, Novartis and Orange were sold. Eni, TotalEnergies, Deutsche Bank, KB Financial Group and Bank of America were bought.