Head of Saxo Strats
Summary: The rally in global equities has pushed equity valuations above their long-term average increasing the risk for equities should interest rates increase due to stickier inflation in the coming months. Retail investors are also indicating in surveys that they are the most bullish since November 2021 and the number of S&P 500 stocks above their 200-day moving average is at 73.5% suggesting for room for the rally to extend. Finally, the recent bet on the economy to reaccelerate its growth is visible in banking stocks that are fast approaching their all-time highs.
Valuations are on the rise again
Equities have been through in a raging uptrend since early October and as of January it pushed global equity valuation to the highest since May 2022 and levels reflecting optimism on growth and the economy. Based on data since 1995 the average expected 10-year annualised real rate of return is now 1.3% based on the current level of equity valuation. This elevated equity valuation has pushed up the sensitivity to higher long-term interest rates which for now are well-behaved but could get a jolt if signs emerge that inflation remains stickier than expected.
Retail investors are now the most bullish since early November 2021 which was around the peak in the equity market. The rate of change has been quite dramatic and has gone hand in hand with equities rallying since early October of last year. But with big moves and elevated sentiment comes a higher risk of a reversal in the market.
Another way of expressing investor confidence is to look at the percentage of S&P 500 companies that are trading above their 200-day moving average. As of last week that number reached 73.5% which is the highest since December 2021 expressing the same level of risk sentiment as the bull-bear spread. This level is not quite in the exhaustion area which typically kicks in above 80%, so this indicator could suggest that there is room for more gains in equities.
Economists are confused these days because the US leading indicators are suggesting that the US economy should slow down and slip into a recession, but instead more indicators are beginning to suggest that instead of a soft landing the economic plane is instead taking off again. US total loans and leases on the balance sheet of commercial banks are increasing at a faster rate than during the years leading up to the Great Financial Crisis indicating that the US economy is actually experiencing a credit boom. Higher credit growth on top of higher rates is the perfect fuel for the engine that powers banking earnings and thus the global banking index is fast approaching its all-time high.
2024: The wasted year
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With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
