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October 16, 2023 - Another October, another market low in place ?



It feels strange writing about market anniversaries and potential lows, when a military conflict is under way. But it was the 14th of October 2022, exactly one year ago, that global equities registered their low, in a horrible year for most asset classes. The rebound was impressive, although there are sectors and stocks that after the recent steep correction, they have returned to those and even lower levels. Historically October has been associated with market turmoil, with the most impressive and well known one being the crash of Wall Street in October 1987, coincidentally around these days of the month, when the Dow Jones index lost almost one quarter of its value in a single day. This is not to say that we expect a similar event, ever again. On the contrary, as we explain below there are reasons to make us believe that on a 3-month horizon, the market can continue a rebound and attempt a year-end rally, that could bring back the previous highs of the year. A major escalation of the current geopolitical issues, would of course, change things.


Monitoring closely the markets' conditions we could say (or hope) that the 2023 lows have already been seen or are very close. Most technical indicators, like the widely used RSI (relative strength index) found themselves in deep oversold territory, which usually points to a short-term reversal of trend. Even more importantly, the hedge fund community and the CTAs, which use computer programming to trade fast in and out of asset classes on a daily basis, are now max short equities. Actually, according to the latest data they have been so short equities only 4% of the time, in the last 30 years. And being short the market, means that the next move is to buy to cover these shorts and make profits or stop their losses. It also tested, last week, with success its long-term support (the 200-day moving average). Lastly, the S&P500 has corrected about 10% from the July high, which is considered a rather typical and healthy correction in the process of a bull market.


US inflation numbers were ok, but with some negative details. The headline CPI rose 0.4% in September while the yearly rate remained unchanged at 3.7%, after rising in the prior two months. This was however a touch higher than expectations, which were calling for a drop to 3.6%. As has been the case in the past couple of months the headline CPI increase was again led by energy prices, which rose 2.25% in September. Food prices rose 0.23%, similar to increases in the past couple of months. The core CPI, which excludes food and energy, increased 0.3%, stronger than the monthly change of the previous two months. But the yearly change was 4.1%, lower than the 4.3% of August and exactly as expected. What got the market worried is that shelter prices, which include both rents and lodging away from home, jumped a surprising 0.65%, while the rate of growth was expected to slow down. Overall, we do not believe these were worrisome data, but rather not as positive as we would have hoped them to be.


The minutes of the last FED meeting seem to be a bit outdated. Published last Wednesday, the minutes showed what we already knew from the announcement and the press conference of Mr. Powell during the September 20th meeting. Back then, which now it seems like an "eternity", the FED members forecasted one more rate hike and told us that they will not cut interest rates as aggressively as the market had thought. But since then, a lot has happened. First of all bond yields have already risen by more than 30bp, which could be considered the same as the FED increasing rates. Several FED officials have been very talkative in the last few days, all of them hinting that we might have already seen the peak in rates and that their focus is not the next rate hike, but for how long they will stay at the current levels. This looks to us as the typical way to offer some guidance for the next move and basically "cancel" the message that had been conveyed to the public three weeks ago. The military conflict in Gaza is of course another big factor which makes the case for another rate hike in November a distant possibility.


Commodities rallied on Friday, as investors were getting prepared for an eventful weekend in the Middle East. Oil prices spiked, with WTI trading up to 88$, while Gold shot up to almost 1950$. As a reminder, Gold was trading at around 1800$, just before the military conflict begun. Investors also sought safety in the Swiss Franc, with the EURCHF falling below 0.9500, to a new record low (record high for the swiss currency). Fortunately, there has not been further escalation as the week starts and Israel's major allies, like the US, are calling for patience and avoiding aggressive actions that will endanger thousands of civilians. The situation remains very fluid, however.


In a volatile week, equities finished on a mixed note. The S&P500 managed to post a small gain of 0.4% as Nasdaq fell about 0.2%. A rally in shares of defense companies, as well as financials and energy pushed the Dow Jones higher by 0.8%. In Europe, Swiss stocks moved higher by 0.6%, as investors sought defensiveness but Eurozone stocks finished lower by 0.7%. The rally in commodities and oil pushed the Energy Sector up by 4%, while Healthcare followed the lead with a 1.5% gain.

Bonds were all over the place. They started with a rally, as news about Israel broke during the weekend, but as equities recovered, they lost ground again. Then on the day of the US inflation numbers which coincided with a huge supply of almost 100bn$ of Treasury bonds, bonds sold-off and yields spiked by more than 15bp. On Friday, and as news of an imminent ground offensive in Gaza were hitting the wires, bonds found again buyers and yields fell again. The US 10-year yield is trading at 4.65%, down from the almost 4.90% just one week ago.


In corporate news, the first Q3 results coming from the US banks were broadly positive. JPMorgan and Citigroup announced both revenues and profits better than expected and raised its full-year guidance for its net interest income, which is the biggest source of revenues for a commercial bank. US banks trade at very attractive valuations compared to their history, with the only issue being that in case of a recession caused by the high interest rates, they are usually the first to be "hit". In other reports, the luxury giant LVMH ,owner of Louis Vuitton and Hennessy cognac among other brands, announced lower organic growth (9%) than expected (11%), primarily due to weakness in the wine & spirits division. The stock is now almost 30% lower from its peak in early summer, where it was definitely on the overvalue side. However the recent drop is creating significant opportunities for the long-term investor, to own the shares of a company who is still growing at double digits, it has low debt levels compared to its equity, pays a 2% dividend and is priced at little over 20 times earnings.

Chart of the Week : Europe's discount vs the US has deepened again to buy territory.



The above chart shows the discount in terms of valuation (price-to-earnings) of European stocks vs their American peers. This discount is back at almost 35%, which is the highest in living memory and the highest for the last 10 years. Of course, we should note that the valuation discount has been primarily created in the years 2020-2022, thanks to the big rally of a handful of US Tech-related companies. Still however, it is something worth noting, as we tend to believe that this discount will become smaller again. If we take into consideration October 2022, when it was the last time that the discount reached 35%, in the following few months and until now, the Eurostoxx50 index has performed better than the S&P 500. This difference in performance in favor of the Eurozone stocks would have been greater, had it not been for the May-July rally of the Tech-related companies, sparked by the news of Nvidia, the semiconductor company with the AI chips. Based on this observation and having returned to the same, huge discount of last year, we have grounds to believe that in the next 6-9 months EuroStoxx-50 might perform better than the S&P500.


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 : Factset . Photo: AP Photo/Mary Altaffer

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