Unprecedented times go hand in hand with unprecedented market moves. The S&P 500 for instance has after several attempts broken out of its trading range and keeps so far at new highs. This was not only the fastest bear market in history, but it was also the fastest recovery rally and the shortest time period until the next bull market begins. At least if we use the traditional measurements and call the beginning of the next bull market once we have reached previous record levels.
However, we keep repeating that markets are overbought, the distance to the 200-day average has reached extreme levels and pullbacks can happen any time.
The latest equity market leg up was driven by the new plasma Covid therapy which is now broadly accessible in the US although researchers do not fully understand how well the therapy works.
Over the last four weeks the major 4 central banks have increased their balance sheets by buying risky assets. This goes hand in hand with a further rise of the MSCI World index. We would say that if this bond programs are ongoing the equity markets in general will continue to go up. Short-term however we think the market measured by the RSI is overbought. The US rally was mainly driven by 7 stocks, while the rest of the market went on average down.
Fig. 1: G4 central bank balance sheets and MSCI World
Meanwhile US real yields are still negative. This week at the Jackson Hole central bank meeting further hints regarding the future monetary path and especially about the Fed inflation target are expected. The most likely outcome is that an overshooting of inflation will be added to the Fed goals. Having said that we can therefore expect that negative real yields are part of the new Fed tool kit (aka financial repression).
Fig. 2: Nasdaq rally now and in 2008/2009
Fig. 3: MSCI growth PE in comparison to the market and value Index
The US market rally is mainly driven by 7 tech stocks. The growth PE is at elevated levels of around 30 times while value keeps at moderate levels.
Fig. 4: Eurozone PMI take a pause while US and Japan data is encouraging
The latest Eurozone PMI show a possible slow down, while in the US the data surprised and stayed in the growth area. Hedge funds and other professionals have completely missed this liquidity driven rally. It seems retail investors keep driving this market further up into a bubble
Fig 5: Hedge funds have missed the recovery rally completely
Fig 6: US markets are overbought, but at the same time on record levels
Fig 7: Gold had a 48-hour 10% correction – is still overbought and might consolidate before the next leg up
We believe that mid-term gold could rise to USD 2’500 per ounce, mainly driven by money flow and supported by zero central bank interest rates.
The latest German IFO index shows a V-shape recovery, but it still has not reached the pre-crisis level. Some argue that the best leading indicator for the IFO (which is a leading indicator) is the German DAX equity index. Both are telling us that the gloomy forecasts of economists might be too dark.
Fig 8: German IFO rebounds
The newest forecasts of Barrons newspaper or JPM are that we are in a bubble, the bubble will get bigger and finally it will burst. If it bursts now they are right and if it is later they are right too. From a language pint I am impressed, but it keeps you lost in no man’s land.
We continue to see higher equity prices over the coming months, but hope for a correction over the next weeks. We keep our positive gold outlook. Gold went down during 48 hours roughly 10% and might now consolidate at current levels before moving further up.
Published: 25/08/20 by Blackfort CIO Dr. Andreas Bickel
This Blackfort Insights (hereafter «BI») is provided for information purposes only. This document was produced by Blackfort Capital AG (hereafter «BF») with the greatest care and to the best of its knowledge and belief. Although information and data contained in this document originate from sources that are deemed to be reliable, no guarantee is offered regarding the accuracy or completeness. Therefore, BF does not accept any liability for losses that might occur using this information. BI does not purport to contain all the information that may be required to evaluate all the factors that would be relevant for entering into any transaction and anyone hereof should conduct their own investigation and analysis. In addition, the BI includes certain projections and forward-looking statements. Such projections and forward-looking statements are subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond the control. Accordingly, there can be no assurance that such projections and forward-looking statements will be actualized. The real results may vary from the anticipated results and such variations may be material. No representations or warranties are made as to the accuracy, or reasonableness of such assumptions, or the projections, or forward-looking statements based thereon. This document is expressly not intended for persons who, due to their nationality or place of residence, are not permitted to access such information under local law. It may not be reproduced either in part or in full without the written permission of BF.
© Blackfort Capital AG. All Rights reserved.