All-time-High or 1066? Where is the stock market going?

All-time-High or 1066? Where is the stock market going?

10 October 2018 from Boartrader

October darkness penetrates Sweden and, apparently, also the Stockholm Stock Exchange. When the fourth quarter's trading has lasted for just over a week, we immediately note a correction of the strong upswing that characterized the previous quarter. Much because of interest rate turmoil and tumult about the extent of money laundering in the Baltics. A healthy correction from high levels say the one, a nuisance the others say. Whether you are bear or bull, investors should have a reasonable look at where we are in the current stock market cycle.

"We never know where we are going, but we sure as hell should know where we are." - Howard Marks

Let's look at three key indicators to read the stock market climate in the medium term:

PMI - Purchasing Managers' Index

PMI is a measure of the manufacturing industry and measures, among other things, order intake, production and employment. The number is relevant to keep track of as it acts as a business surveyor.

Source: FactSec

During the first half of 2018, we have seen a slowdown in Manufacturing PMI, which indicates that growth is slowing down. Something like several engineering companies also flagged for Q1.

CPI - Consumer Price Index

CPI is a measure of price developments in private consumption. How CPI evolves is relevant as it acts as an indicator of current inflation. Rising inflation means higher input and wage costs for many companies, which may affect margins in case of growth, or PMI, slowing down.

Shaded areas indicate recession, Source: FactSec

This year's decline in PMI has so far not caused any major problems as demand is still relatively high, prices can be raised with inflation. But given that demand would decrease slightly, higher inflation will eat from many companies' margins, which will definitely be reflected in stock prices.

The interest rate on US government bonds (10-year-olds & 2-year-olds)

US Treasury bonds are important for keeping track of bonds, as bonds serve as a market confidence indicator. In simplicity, it can be said that low yields from US government loan paper signal confidence in the stock market, which means, it is more attractive to place money in asset classes than "risk-free" debt securities, and vice versa.

Shaded areas indicate recession, Source: Reserve Bank St. Louis

In the face of previous financial crises, we have seen how the short-term interest rate has risen sharply and passed the long-term, which allowed investors to sell stocks and other assets to invest in short-term interest-rate securities, which then generated a high risk-free return. The difference, or "spread" between these two interest rates is illustrated in the diagram above and, as you can see, there is a delay effect of 1-2 years from the time the interest rate curve turned to the recession.

To summarize, we can see that we have come a long way in the current stock market cycle, but none of these three indicators indicate that a stock market crash is imminent in 2018. The turmoil, however, begins to recover. It does not mean that it blows up to the storm per se, but it may be a position to have a closer look and be more selective.

Many investors focus on the portfolio and try to focus on late-cyclical companies and avoid companies with high values (P / E multiples). "Expensive" companies dealing with high multiples have historically had the biggest downside at stock markets, so at the moment, maybe not the time to enter these. Sectors such as energy, healthcare, raw materials, industrial products, IT, real estate and consumer goods, all of which are considered as cyclical sectors, have historically been stable even after a long stock market upturn. The raw materials companies' development in 2018 is a clear indicator of this.

Furthermore, it may be wise to increase exposure to the short side, as hedge, if you feel that investors are high exposure to the long side. Vontobel has a range of derivative products that offer opportunities to speculate in both the stock market ups and downs, the Stockholm Stock Exchange as well as the US and Germany.

The leverage products such as Bull / Bear certificates are best suited for intraday trading and consider that the leverage effect works in both directions. However, for speculation in the slightly longer term, there are both mini-futures and turbo warrants.

How deep is the rabbit hole?

To date, we have only scratched the surface when it comes to the indicators that investors can use to form a better perception of the stock market development. The future is unclear, and much depends on how the FED, ECB and BoJ act in the future. Jacob Henriksson, perhaps more famous as @Gottodix, has written a very readable chronicle that goes more into discussing indicators for those who want to immerse themselves in the subject. Keep in mind, however, that leverage products are associated with very high risk.


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This information is in the sole responsibility of the guest author and does not necessarily represent the opinion of Bank Vontobel Europe AG or any other company of the Vontobel Group. The further development of the index or a company as well as its share price depends on a large number of company-, group- and sector-specific as well as economic factors. When forming his investment decision, each investor must take into account the risk of price losses. Please note that investing in these products will not generate ongoing income.

The products are not capitalprotected, in the worst case a total loss of the invested capital is possible. In the event of insolvency of the issuer and the guarantor, the investor bears the risk of a total loss of his investment. In any case, investors should note that past performance and / or analysts' opinions are no adequate indicator of future performance. The performance of the underlyings depends on a variety of economic, entrepreneurial and political factors that should be taken into account in the formation of a market expectation.

02/12/2022 04:31:40


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