A Mild Bout of Market Indigestion

Aoifinn Devitt – Chief Investment Officer

Markets eased back from the Thanksgiving holiday with a bout of mild indigestion, and were generally mixed in the early part of this week. Data varied from disappointing PMI data to more upbeat data around demand for durable goods, and the oil price was volatile as investors kept a keen eye on global growth.

The proxy for global growth is most often China nowadays – and the news flow coming out of China was particularly mixed this week. The news has lurched from early signs of loosening Covid restrictions, followed by spiking numbers, and then protests in response to renewed health measures. It remains difficult to discern what exactly China’s long-term plan for living with Covid will be, but, for now, markets seem inclined to believe that the country will return to its market economy stance. We see this through the snapbacks in markets at the sign of any positive news around reopening.

In the US bond markets there was also mixed messaging – the inversion of the US yield curve is now the steepest in some time – and indeed the difference between the 10-year and the 2-year yield is now the most negative it has been since 1981. Usually an inverted yield curve indicates a pending recession, but currently it seems to be interpreted as an indication that inflation is on its way to being tamed.

Bond markets have definitely taken a battering over the course of this year, with intermediate-term US government bonds now displaying the worst 12-month trailing performance on an inflation-adjusted basis since 1926. But in another indication of how market sentiment is turning a corner, flows into the fixed income arena are up, and investors have invested almost $16bn into US corporate bond funds this month, indicating the uptick in sentiment based on indications of easing inflation.

As mortgage rates remain high, existing-home sales have fallen for nine straight months through October, and sales activity seems to be much muted across the country, with the notable exception of booming markets such as Miami and Tampa.

Tech as a sector remains fraught as the holiday shopping season gets into full swing. The tech-heavy NASDAQ remains down almost 30% year to date and lay-offs as well as slackening consumer demand dominate headlines. Cyber Monday sales were strong, evidently, but the public spats of some tech giants – namely Apple and Twitter this week, reveal just how much power some of the largest companies have. And everyone has noticed. Next week on December 13 the Senate will investigate “the collapse” of the crypto-exchange FTX, and the recent debacle over the sale of Taylor Swift tickets sparked renewed calls to investigate the market dominance of Ticketmaster. Regulatory risk is starting to emerge as a significant risk in the tech ecosystem, and the ongoing weakness of the sector’s stocks suggests that market sentiment is unimpressed at present. This suggests that equity market strength will center on other sectors – some old-economy such as the industrial and energy sectors and some defensive, such as healthcare.


Source: Morningstar as of 11/30/2022

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