In financial markets, a "dead cat bounce" is a short-lived rally within a bear market trend. As even a dead cat will bounce if thrown from a high altitude, stocks can exhibit the same counter-trend behavior. This typically leads investors to sell into strength, as they wish to maintain their view of the previous down trend in those stocks or regions and hold on to their winning positions. If these bounces occur against the fundamentals, one can be almost certain that the rally will be short lived. However, if they come from depressed valuations, sometimes these are true reversals. The problem is that there is no way to know when these rallies are false or real inflection points, until many weeks/months ahead. This is the case with parts of the European equity market.
Last week, Eurozone equities outperformed their US peers with a big differential and the Trump trade fell behind. The German DAX crossed the 20k mark for the first time ever, with a 4% rally and the EuroStoxx50 finished the week 3.5% higher. At the same time the S&P500 was up by a mere 1% and US small caps lost 2%. The Tech mega-caps' rally helped Nasdaq shine however, with a 3% gain. Even more suprising was the rally in European beaten-down consumer names, with no real news. Luxury posted strong weekly gains (LVMH 7%, Kering 10%) and even consumer staples names like L'Oreal moved higher by more than 6%. It will be interesting to see if this week will bring any follow through, or investors will sell into their strength, starting today.
There are good reasons for this bounce, as the valuation gap between them and their US peers has grown to almost record highs (with the 1999 period being the ultimate record). But the issue is that up to a few days ago, valuations did not seem to matter. We have talked about the consensus view that the US supremacy will continue for the foreseeable future, and the 23 times earnings valuation of the S&P500, the highest since the early 2000s, does not seem to pose a problem. Almost all major investment banks have already raised their 2025 targets for US equities and there is no cloud in the horizon. Even Morgan Stanley's bearish US equity strategist capitulated and is now bullish for next year. Hence, for most market participants last week is probably a dead cat bounce, and life will continue as before.
The US labor market data continued to be confusing, and totally unreliable in our eyes as we have said several times. There are two surveys that generate the labor market data, which the markets are carefully watching. The Establishment survey calculates the famous monthly non-farm payrolls and these rebounded in November to 227k from just 36k in the previous month and better than the 200k expected. The Household survey, which calculates the unemployment rate, found that the labor market worsened in the same month. Unemployment rose to 4.2%, and according to this survey the US labor market lost 355k jobs after losing 368k in October. Go figure.
The ISM November Services index collapsed 3.9 points to 52.1, much worse than expected (55.7) expected. The November decline contrasts the improvement seen in the index ahead of the data, with the index gradually moving closer to the range it occupied pre-pandemic in recent months. This is definitely positive for inflation but not so much for economic growth. Comments from multiple industries mentioned potential changes to trade policy because of Trump. For example, information technology respondents reported, "We have concern after the presidential election that tariffs will affect prices for electronics and components in 2025." Professional, scientific & technical services comments said, "Election results and the potential tariff changes would impact inventory and lead to higher prices in the hospital supply chain. What we saw during COVID-19 with startup US production is a warning sign again."
The ECB is meeting on Thursday and a 25bp rate cut should be a done deal. Given the recent lackluster macro economic data as well as France's troubles, the ECB is set to deliver yet another rate cut. Some market parcitipants expect a 50bp rate cut, but the recent rise in inflation, albeit temporary, will probably make the hawkish north (Germany, Austria etc) to not agree with such a decision. It will be the first meeting after Trump's elections and would be interesting to see ECB's President being asked about it in the press conference. Normally, the head of a central bank should avoid any comment on politics and politicians, but Mrs. Lagarde is not your average central banker.
In politics, we had a rather turbulent week. France's Prime Minister lost the no-confidence vote, as widely expected and President Macron is looking at all options available: from a temporary government that will try to pass a new budget, to rolling the 2024 budget into the new year and finally to the least likely event of him resigning and causing presidential elections. In the US, President-elect Trump saw his choice for Defense secretary be dealt a blow, as the Fox News host, Mr. Hegseth has drawn criticism (and a potential No-vote) among a few Republican senators. He also picked as Head of the SEC (financial markets regulator) a cryptocurrency enthusiast, Mr. Atkins, driving Bitcoin traders delirious and its price above 100k. At the same time, the collapse of Assad's regime in Syria is still not clear which markets will impact and how.
Chart of the Week : The US market is getting crazier by the day.
The above chart, created by Pictet Asset Management, shows the P/E valuation of Amazon (grey line) compared to Walmart (brown line), the US retailer. Amazon is currently trading at "just" 34 times earnings, but this however is the lowest it has been in more than ten years. We all know that Bezos' baby was enjoying valuations north of 50 times earnings for most of the last twenty years or so. At the same time, the relentless rally of Walmart (which we liked and owned but sold it a while ago due to valuation concerns) is now trading as an ultra-growth tech company. Admittedly the comany has outgrown its peers and has gained market share, but something does look wrong in this picture. As we have said above, valuations do not bother anyone today. Until they do.
Disclaimer
• The content of this document has been produced from publicly available information as well as from internal research and rigorous efforts have been made to verify the accuracy and reasonableness of the hypotheses used. Although unlikely, omissions or errors might however happen.
• The data included in this document are based on past performances and do not constitute an indicator or a guarantee of future performances. Performances are not constant over time and can be positive or negative.
• This document is intended for informational purposes only and should not be construed as an offer or solicitation for the purchase or sale of any financial instrument and it should not be considered as investment advice. The market valuations, views, and calculations contained herein are estimates only and are subject to change without notice. Any investment decision needs to be discussed with your advisor and cannot be based only on this document.
• This document is strictly confidential and should not be distributed further without the explicit consent of Kendra Securities House SA.
• Sources: Chart of the Week :Pictet Asset Management
Comments