There are several concerns that are plaguing investors:
– The inflation report was higher than expected, flattening out and then rising again in March.
– Ex-shelter services inflation was +4.77% year-on-year in March compared to +3.94% in February. This marks the fifth month of the last 6 that on a year-over-year basis it has accelerated and is now increasing at the fastest pace since April 2023, when it was decelerating.
– The year-on-year increase in CPI inflation ex-energy which currently appears to be modest. It was +3.57% year-on-year in March compared to +3.54% in the previous month.
– The S&P 500 had its biggest negative weekly close in 6 months.
– For the first time in 2024 volatility is increasing. The VIX closed above October 2023 levels.
Overall, this data currently suggests that inflation is “sticky” and disinflation is slowing. But it is also true that the dynamics of energy and raw material prices were the catalyst, just think that prices recorded a +26% compared to the December lows.
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But the reacceleration of inflation is not necessarily a negative factor for equities. Ex-shelter services inflation compared to the index shows that each of the periods characterized by an acceleration in inflation itself was also a bullish moment for equities.
The report gives us a positive input that modest levels of accelerating inflation correlated with periods of economic growth are actually bullish for stocks. So there is a possibility that inflation and the Nasdaq will go up together, obviously without the former going “out of control”. In fact, examining the 1995-2024 comparison, ex-shelter inflation in the periods that remained below +5%, on an annual basis, gave the stock market the opportunity to continue its rises.
Given the early signs of volatility this year, we must remember that pullbacks are “also” normal.
The graph shows the maximum pullback per year of the S&P 500 and the average annual pullback which corresponds to 14.2%, and in this 2024 it was “only” 2.5% which is equivalent to the minimum drop ever, as in 1995. In fact, if you recall, as strong as the rally was last year, stocks still corrected by 10.2%.
We often talk about where we are in this bull cycle and we often hear that it is too late and that the bubble will soon burst. One of the reasons people often compare the tech-led stock market rally to the disastrous dotcom “implosion” of 2000 is that in reality, think about it, it was the only real bubble to burst in the US stock market (in post-World War II period) due to increasingly foolish valuations that eventually succumbed to the real data: little revenue or profit growth emerged. The tech sector today is nowhere near as expensive and is experiencing a real positive period on the underlying revenue side.
At the same time, the Global Equity Risk-Love index at the 86th percentile confirms that a short-term pause in equities would not be a surprise
The indicator tracks a variety of measures, such as manager positioning, put-call ratios, investor surveys, prices, volatility, and correlations. If the value is around 0.8 or above, the global stock market is in “euphoria”. Conversely, if it fluctuates at -0.8 or lower, the dominant sentiment is “panic.”
Taking into account a variety of indicators, valuations, fundamentals and sentiment, there is support for the possible short-term pullback. In fact, the ratio levels are at maximum levels of optimism, suggesting that risk is increasing in the short term. Without excluding future increases, given the past “persistent” medium-high levels which led to a continuation of the positive trend in the following months.
The next chart shows that we are actually in the middle cycle of the bull market.
According to Fidelity’s chart, another way to visualize the cycle is to represent it as a clock. If 12:00 is the start of the cycle, compared to the longest cycles in history, right now the clock says 3:00 while based on the average cycle, it is 18:00. Time still appears to be on the bulls’ side for both cases.
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Until next time!
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“This article was written for information purposes only; it does not constitute a solicitation, offer, advice, consultancy or investment recommendation as such it is not intended to encourage the purchase of assets in any way. I would like to remind you that any type of asset is evaluated from multiple points of view and is highly risky and therefore, every investment decision and the related risk remain the responsibility of the investor”.
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