The US is officially in a bull market right now but it really does not feel like it.
The mood among investors this year has been mostly one of frustration as high inflation, the banking crisis, US debt ceiling talks and a slowdown in China have squeezed sentiment.
Yet the news is in and we are definitely in a bullish phase, even if much of the growth came last autumn, rather than in 2023.
Last Thursday, the S&P 500 closed at 4,293.93, a rise of more than 20 per cent since its recent low on October 12, 2022.
So, why do investors seem relatively glum?
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The US stock market may have rallied but nearly all the growth has been driven by a handful of stocks in the technology sector, with little action elsewhere.
Technology titans Apple, Microsoft, Google-owner Alphabet and Amazon are up by about 40 per cent this year while chip maker Nvidia has rocketed 170 per cent, driven by the hot-headed artificial intelligence mania.
Facebook owner Meta and electric car maker Tesla have also been shooting up, making good some of last year's losses.
However, once you remove those seven stocks, the S&P has actually fallen this year, while UK, European and emerging markets are not exactly flying.
So, unless investors have gone big on US tech, they will not be looking at their portfolios and feeling much richer.
However, it is better than we could have expected, given that last year's inflationary scourge is far from defeated.
At the start of 2023, investors were holding their collective breath and waiting for the day when the US Federal Reserve and other global central bankers would “pivot” and start slashing interest rates rather than raising them at record speed.
The optimists assumed that day would have arrived by now, but it keeps getting pushed further back.
Central banks are still raising rates as they battle to suppress inflation, with the Bank of Canada delivering a surprise increase of a quarter of a percentage point to 4.75 per cent last week, hard on the heels of the National Bank of Australia, which lifted rates to an 11-year high of 4.1 per cent.
The Bank of England will surely follow on June 22, lifting rates to 4.75 per cent, with a string of further increases to come as inflation runs rampant.
Rising oil prices following Saudi Arabia’s production cut are not helping either, says Chris Beauchamp, chief market analyst at online trading platform IG.
“The combination of high interest rates and rising oil prices has proved to be dangerous for stocks over the past 18 months,” Mr Beauchamp says.
The US tech stock bounce is starting to look “overextended” and sellers now have the upper hand as buyers retreat, threatening the bull market, he adds.
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Investors are desperately hoping the Fed will hold its funds rate at today’s range of 5 per cent to 5.25 per cent at its next meeting on June 14, the first freeze since it began increasing rates in March last year.
That may only be a temporary pause, though, as US inflation is proving sticky at 4.4 per cent in April, rising to 4.7 per cent when stripped of volatile food and energy prices. That is still more than double the Fed’s 2 per cent target.
Markets have faced a lot of headwinds this year, including February’s banking meltdown and the US debt ceiling crisis.
These have blown over but investors refused to be cheered and are now turning their focus to China, Mr Beauchamp says.
“The boost from the reopening of China’s economy seems to have faded altogether, putting recession fears at front and centre once more.”
Chinese exports fell 7.5 per cent annually in May, which came as a shock following the 8.5 per cent growth registered in April, and a recession looms.
China's current weakness is also weighing heavily on European markets, says Fawad Razaqzada, a market analyst at City Index. “The nation is a big export destination for European companies, from luxury brands to car makers.”
Europe is already in a recession, after revised data show that its economy shrank by 0.1 per cent in the first three months of this year, marking two consecutive quarters of contracting gross domestic product. High energy and food prices and falling consumer demand are to blame.
Monetary policy tightening could also bring the US economy to a grinding halt towards year end, warns Christian Gattiker, head of research at Julius Baer, who has called 2023 the “year of the cool down”.
“The US will likely cool off more than other countries after having been a growth stronghold.”
Emerging markets offer investors the best hopes of decent returns right now as they should expand their growth advantage over developed countries, says Luca Paolini, chief strategist at Pictet Asset Management.
Currently, their GDP is growing 3 per cent a year more than the developed world, and he expects it to hit a 10-year high of 5 per cent, boosting corporate earnings growth.
“We forecast an 11 per cent rise in earnings growth for emerging markets this year, compared with near zero in the developed world,” Mr Paolini says.
Mr Paolini is particularly downbeat about the eurozone and says Pictet is “defensive at a time when developed world companies are struggling to grow earnings in a slowing economy, and are overweight in consumer staples companies and the healthcare sector”.
If the tech rally fades, markets are in danger of losing all sense of direction and we are not even in the dog days of summer yet.
However, investors should not be too glum as things could be worse, says Susannah Streeter, head of money and markets at Hargreaves Lansdown.
“Economies have been proving way more resilient than expected, with the World Bank revising its 2023 growth forecasts upwards from January’s 1.7 per cent to 2.1 per cent,” she says.
The World Bank ruined that by warning that 2024 could be tougher as more of the impact of higher rates is felt and tightening credit conditions show up in lower investment.
“It is now forecasting global growth to come in at 2.4 per cent next year, down from the 2.7 per cent it originally forecast,” Ms Streeter says.
Tech investors who have benefitted from the bull market should relish their good fortune, but those who missed out should think carefully before jumping on the bandwagon at this late stage.
Yet, as today’s weird bull market proves, stock market movements are impossible to second-guess. Sometimes, they are hard to explain, too.
