Fear Of Missing Out (FOMO) is a strong sentiment among investors, which sometimes leads them to rush into buying the asset class in which they were not invested, as prices continue to move higher and higher. This phenomenon creates a "snowball effect" which pushes prices even higher, and convinces even more investors to buy, which themselves push prices higher. There are two lessons which we have learned through our investing experience: a) It is usually not a good idea to buy (or sell) in panic and b) timing the markets is a futile exercise. It is for these reasons that we remain always invested, tweaking, of course, from time to time the allocation to equities from the riskier parts to the more defensive ones and the opposite when warranted, as valuations and long-term fundamentals drive our decisions, and not sentiments.
It is no surprise then, that global equity allocations are at the highest level in two years, according to the latest Bank of America Global Fund Manager Survey. In particular US stock allocations are at the highest level since Nov 2021 and Technology allocations are at the highest since Aug 2020. The Magnificent 7 remains the most crowded trade. The reduced cash positions and extreme positioning in the market is not always positive for the short-term picture, but it does show that corrections should be shallow and short-term in nature, as the sentiment remains positive. Valuations remain stretched, but we remain invested and are putting on some hedges (ie buying the unloved defensive stocks, that could perform better down the road).
US January inflation fell less than expected. The headline CPI number failed to breach the 3% psychological level, announced at 3.1% but this was still an improvement compared to the 3.4% December print. Core CPI was also announced worse than expected, making no progress with respect to the 3.9% number of the previous month. Looking into the details, consumer goods prices continue to post very slow growth or in some cases a drop in prices (example: used cars), but services continued to be strong. Core services excluding rents continued to rise strongly, increasing 85bp in January — its fastest increase in almost two years — as transportation services rose 97bp and personal services increased 95bp, in a month. The numbers solidified the view that the FED is not going to cut rates in March, as the market believed at the end of the last year.
On the contrary, Swiss inflation fell to 1.3% in January, much weaker than the consensus expectations of 1.7%. Inflation in January is now running well below the latest SNB forecast released at the December meeting, which assumes average inflation in Q1 of 1.8% and is well within the SNB's target range of "below 2%". Core inflation (excluding food and energy) was unchanged at 1.5% y/y, also below expectations for a marginal tick up to 1.6%. It should be noted that these low inflation numbers included two large changes: an increase in administered electricity prices by 18% and higher VAT rates, making the drop even more impressive. The strong Swiss Franc has played its role.
US Retail Sales fell 0.8% in January, below expectations for a softer drop (-0.2%). Equally important was the downward revision of previous months for a cumulative -0.5%, adding to the sense of weakness with respect to consumer spending. There were some comments from analysts which pointed to the cold weather as a reason for the weakness in the data, but food services and drinking places saw sales increase 0.7%, which counters the validity of that argument. Retail Sales at the control group, which feeds directly into the GDP calculation, dropped 0.4%, well below consensus expectations of +0.2%.
Europe's GDP data showed that the region is flirting with a mini recession. The second reading of Eurozone's Q4 GDP did not change the situation (0% growth quarter-on-quarter) but UK's number came in at -0.3% for the same period. This is the second consecutive negative quarter which technically qualifies the country being in a recession. At the same time, Germany's DIHK Chambers of Industry and Commerce warned that Europe's biggest economy will shrink by 0.5% this year, in a second year of recession and its worst downturn in two decades. The survey showed that 35% expect business to deteriorate in the next 12 months with only 14% expecting an improvement, as high energy prices, bureaucracy, a skilled workers shortage and weak domestic demand weigh on economic output. Of course this is just one more prediction by an administrative body, but it reveals the depth of pessimism abundant in Europe's north. On the contrary, Europe's periphery (Italy, Spain, Greece) seem to be firing on all cylinders, in relative terms.
Positive news about China's property market came out of the region over the weekend. According to Reuters, five state-owned Chinese banks have been matched with more than 8,200 residential projects for development loans under the "whitelist" mechanism. Under the "project whitelist" mechanism which was launched on Jan. 26, city governments are recommending to banks residential projects suitable for financial support, and are coordinating with financial institutions to meet projects' needs. The high number of projects already approved for possible support highlights the government's efforts to free up funding for the debt-riddled industry, although it is unclear how many will secure loans.
European defense stocks continued to attract investor interest. Military spending is destined to move higher in the coming years as countries have woken up to the reality that they had reduced their spending as percentage of GDP to the lowest levels in decades. In an interview with the Financial Times, Ursula von der Leyen, the President of the European Commission, sent a clear message that the EU should incentivize Europe’s defense industry to increase production as she warned that the “world has got rougher”. “We have to spend more, we have to spend better, we have to spend European,” she said in that interview.
Equity markets were mixed, as US indices fell, but Europe registered its own new highs for 2024. As mentioned in our last weekly report, European companies continue to attract capital from investors who view that the US Magnificent-7 rally might stall for now. It is worthnoting that Nasdaq fell 1.5% for the week, as Euro Stoxx 50 moved higher by almost 2%. In terms of sectors, Value stocks staged a comeback (Materials, Energy, Financials all higher by more than 1.5%) while Technology lost 1.5%.
Bonds were rather weak, with yields creeping higher. The worse-than-expected US Retails Sales failed to ignite a rally in bonds, as the market is focusing primarily to reprice the potential FED cuts of the year. As a reminder, we had highighted at the end of last year that the 150bp cuts that were priced in were too aggressive for the status of the US economy at this stage. The FED's projection was for 75bp. Just two months into the year, the market's pricing has quickly moved to less than 100bp of cuts and closer to the FED's own projection. It is going to be an interesting year ahead, for sure.
Chart of the Week : Concentration risk in the S&P500 is now at record high.
The above chart compiled by Société Générale shows the share of the top-10 stocks in the total market capitalization of the S&P500, going back more than thirty years. As the sum is always 100%, the fact that the top-10 stocks' share has increased immensely in the last decade is attributed to the much better performance of their stock prices in that period compared to the rest of the market. Back in 1999 and during the internet bubble, concentration surpassed 25%, which caused afterwards the severe underperformance of the Technology related companies for the next ten years. During the pandemic years (2020-2021) the explosion of the Technology group led to a concentration of almost 35% and as it is shown in the chart, what followed was again a massive underperformance of this group for the next 1.5 years. After the 2023 rally and the explosive start of the new year, the top-10 stocks have now surpassed the 35% mark, signaling that there is a high risk of underperformance of the mega cap stocks in the weeks/months to follow. To be clear, underperformance does not only mean a fall in prices, but a performance worse than the rest of the market, even if prices continue to move higher.
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 : Société Générale , Photo: /www.cnbc.com/2021/08/24/avoid-fomo-while-investing
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