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May 22, 2023 - Climbing the "wall of worry" .

Equities continued their rebound from the March lows, climbing a "wall of worry". This is a well-known expression in our profession, when stock prices move higher within an environment of many uncertainties, fears and worries. Such rallies are actually more common, than you might think. And a lot of it has to do with extreme negative positioning in the markets, which means that short covering (ie buying stocks to cover the short) can provide vicious rallies, against an overall negative environment. Today's uncertainties include primarily if (and when) a recession will hit the US and European economies, the inflation going forward and what the central banks' next moves will be, not to mention the geopolitical environment between the east and the west. Uncertainty about the US regional banks and the debt ceiling seems to have faded, at least for now, giving rise to renewed hopes that the rally can continue.

However, the un-even performance of stocks, so far this year, causes concern. It seems that only a handful of companies in the S&P500 have driven all the performance of the index this year. These include the well-known, big Technology companies, which might officially belong to different sectors (technology, communications, discretionary) but they also share the hype of artifical intelligence which has awaken the "animal spirits" again, as in 2020/2021. Nasdaq is up 22% this year and the S&P500 is up 8% in the same period. But if we take the S&P500 equal-weight index to see how the broad market has fared, the index is up only 2% this year. And 7 out of 11 sectors in the S&P500 are actually negative (!) this year with the rest 4 sectors driving all the performance. This is not a healthy bull market .. We need to see more participation and breadth on the move higher to call a new bull market, with more certainty. This must definitely be monitored in the coming months. Having said that, the S&P500 broke out of its February high, and looks poised for more gains ahead, on a technical analysis basis.

Bonds moved sharply lower and yields spiked. The optimism that the regional banks' problems in the US are probably over, as well as that the discussions on the debt ceiling will end with success, drove bond prices lower. The US 2-year yield rose to 4.25%, a whopping 45bp higher from just two weeks ago and the 10-year yield rose to 3.70%. The German yield curve also rose by 20-30bp across the board.

The US debt ceiling discussions ended abruptly on Friday. The two parties remain at a distance and one should consider not only the House Speaker, Republican McCarthy and President Biden who are expected to resume talks today, but the far left and far right wings which will have to be convinced to vote any deal in the two chambers of Congress. Individual congressmen/women do not simply "bow" to what their leader says in the US, they sometimes do vote against them. The situation is far from over, although eventually a solution should be found.

Existing Home Sales in the US fell 3.4% in April from the prior month to a seasonally adjusted annual rate of 4.28 million, according to the the National Association of Realtors This figure represents a 23.2% fall from a year earlier. The national median existing-home price fell 1.7% in April from a year earlier to $388,800, the biggest year-over-year price decline since January 2012, NAR also said. Despite some signs that the housing market seems to have stabilized, it does remain in a recession. The news from Home Depot, the largest home improvement retailer in the US, that its 2023 revenues will be lower than the previous year, for the first time since 2009, can only highlight the housing market's weakness.

But the US April Retail sales were not as bad as feared. They rose 0.4%, below the expected 0.8%, but the details were stronger. The headline miss came from lower automobile sales as well as from a decline in gasoline stations' sales despite higher gas prices. Among the stronger elements in this report: online sales rose 1.2%, restaurant sales continued to move up (+0.6%). On the negative side, a lot of the durable goods elements weakened further, such as electronics and furniture. Clothing sales also declined.

The US weekly Initial jobless claims moved lower, to 245k last week. This figure is much lower than the 265k spike of last week, but it remains in the high range of weekly claims which have been the norm in the last two months, and were last seen before the pandemic. Still, it will require a rise above 300-350k on a weekly basis to make a recession a certainty.

The US Leading Indicators Index fell more than expected. It was announced at -0.65% vs expectations for -0.50%, and this was the 13th consecutive month of falling. The fall was less pronounced than in the previous month (-1.2%) but the absolute index remains in levels associated with recessions, if history is any guide.

Gold fell below its 50-day moving average, to close at 1960$. A combination of higher bond yields, higher equity markets and a strength of the USD has hurt the price of Gold in the last few days. After visiting the 2050$ area, Gold has now fallen almost 5% from that peak and also lost its short-term support at 1985$, where the 50-day moving average sits. There are no meaningful supports until the 1850$ area, but the 1900-1950$ levels can bring in buyers again.

Chart of the Week : Nasdaq can rally strongly during a bear market (2000-2002) and still fall further.

The Nasdaq composite index is 22% higher this year, after having fallen 35% last year. It remains about 20% lower from its high in November 2021. The hype created by the use of artificial intelligence in many aspects of our lives has led traders and investors bid up stock prices of companies which are seen as the beneficiaries of this (primarily semiconductor companies, such as Nvdia), in much like a Covid19 rally of similar stocks in 2020 and 2021. The chart above is looking at what happened during the last time we had a similar bear market after the crash of Nasdaq in 2000, which lasted until October of 2002. We can see (highlighted in circles) that the index had three major rallies on its way to find the bottom. These rallies had magnitudes of more than 30%, with the last one in October 2001 being the "craziest" with an almost 50% jump from the lows. Yet, the index fell further to a new low, a few months later. This is not to say that this will happen again. But it also means that short-term big rallies are not a guarantee for future performance.


• 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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