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June 12, 2023 - Has a new bull market started ?

What caught the media's attention this week is that the S&P500 is now 20% higher than its October 2022 low. Historically, this magic number is thought to signal the end of the bear market and the potential start of a new bull market. It also "works" on the downside, as after a 20% fall from a peak, a new bear market is supposed to have started. These observations are always good for journalists to write something about and create headlines. We are not so sure that they can really be trusted for making investment decisions. What matters most for the evolution of the market in the next 6-9 months is the fundamentals, which always "win" over sentiment and hype, in the longer term.

According to our calculations, just 8 stocks out of the approx. 500 companies in the S&P500 have contributed to the 12% return of the S&P500. And if we exclude these, then the index is actually negative ! At the same time, the market participation is primarily from algorithmic trading programs which buy more into the market as equity prices are climbing and volatility is falling, creating a snowball effect with short covering also providing fuel to the move. It is difficult to call this a very healthy bull market, but these conditions are enough to make the market continue higher.

Going back to the fundamentals, as the half-year approaches, we can now draw some conclusions. The recession is still to be seen in the broad economy, despite the alarming deterioration of various macro economic indicators. This is due primarily to the fact that the consumer has been willing to pay up for services and goods, with excess savings and excess ... cravings from the pandemic period. This means that not only the companies' revenues have been relatively resilient (almost zero growth in real terms), but their profit margins have remained close to the historic highs of the 2021 period, as the high consumer prices feed directly into their profits. This leads to company earnings estimates for 2023 to have remained at the same levels where they were three months ago, without any further deterioration that would have driven the market to lower levels. However, there is a tipping point that we might be approaching, were the greed of companies to continue raising prices to defend their profit margins will make consumers revolt and the end demand is then set to slow down significantly. No one knows when this will happen, but the probability is increasing as the central banks are still raising interest rates and personal savings fall as a percentage of disposable income.

It is a significant week in terms of central banks' action. The FED is going to announce its decision on Wednesday and it is widely expected to leave rates unchanged for the first time since a year ago. But the most important clue that the markets will be looking for in the press conference is whether this action is just a "skip" or a "pause". A skip means that the FED will make it clear that they will raise again in July , so June is just a break from regular action. A pause would mean that the FED is now stopping and every next meeting will be data-dependent. This scenario is the most market-friendly. The ECB is meeting on Thursday and there is no question that they will raise rates again by 25bp, signaling another rate increase in July. As a side note, we should mention that last week the central bank of Australia and that of Canada raised interest rates by 25bp, which was not expected. Markets' expectations for interest rates for the FED and the ECB will be crucial for the next move of financial markets in the summer period.

The US ISM Services number collapsed to 50.3 in May, vs 51.9 in April. This is the first time in the last few months, that data from the Services industries have shown such deterioration and on the brink of recession (50.0 signals the neutral level). And this is important because it is the services businesses that have kept both employment and economic growth at decent levels since last year, as manufacturing continues to be in recession.

The US weekly initial jobless claims spiked again to 261'000 people. This had happened again just a few weeks ago, only for that number to fall back to around 240k in the period that followed. As we have said several times, the US unemployment is perhaps the only macro economic indicator which does not point to a recession, despite the jump to (a still low) 3.7% in the previous month. If initial jobless claims start climbing towards the 300k, then the recession scenario will start getting attention again in investors' minds.

US equities were rather flat for the week, while Europe continues to trade weak. The S&P500 made several attempts last week to overcome the 4300 level, which is the August 2022 high, but failed. It is expected, however, to make another attempt this week. Europe's broad indices were down about 0.6% on average and Swiss stocks particularly weak, with the large-cap SMI index falling 1.7%. European indices remain about 2-3% lower from their mid-April highs, while the US indices are at new 2023 highs.

Bonds suffered a setback and yields rose, despite the worse-than-expected macro data. The market is more focused on the FED and the ECB meetings, where expectations have shifted towards more hawkishness lately. The US 2-year yield finished the week at 4.62% and the 10-year at 3.75%. In Germany the 2-year yield now sits at 2.90% , despite the expectations for the ECB to move rates closer to 4% by the end of the year, as the market believes that rates will come down fast in 2024. The rise in yields has made us more warm again to increase duration of the high quality bonds which we would be buying (3-5 years maturities).

Chart of the Week : Market euphoria has driven the Volatility index (VIX) back to the lows of 2018/2019.

The chart above shows the Volatility Index or VIX for the last 10 years . When there is calm in equity markets volatility tends to move lower, and the reverse holds true. In times of stress the VIX index spikes higher. At the same time, when there is too much calm in the markets (hence VIX very low), it is usually when the market finds its peak and corrections follow. And when VIX is at very high levels and fear has taken the place of euphoria, it is usually followed by a market rebound. We are now at a level of almost 13 of the VIX, and we have highlighted some periods where volatility had fallen to current and even lower levels. We were at the same levels of volatility at the end of 2021. We all know what happened afterwards in 2022. This does not mean that the volatility cannot drop further as it did at the end of 2017. And what followed, was that 2018 turned out to be a horrible year. We should also emphasize that the volatility index can remain in calm, low levels for several months or even years, as in 2013-2015, and markets continuing moving higher. It is not a metric that someone should base his investment decisions on. It is just a metric to make us moderate our euphoria and remind us that the best time to add risk is during volatility spikes and the best time to reduce risk is when everything looks extremely calm.


• 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 : Factset


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