The recent swing in global financial markets sends unbalanced signals regarding the direction that stocks and other risk assets will take in the coming months, and in this context the opinions of the main Wall Street analysts are also divided between excessive pessimism and somewhat cautious optimism. Who gives more?
And, after a prolonged period of gloomy forecasts due to the fall of the benchmark S&P 500 stock index from its all-time highs, In recent weeks, some dissident voices have emerged who dare to predict a possible tactical rebound end of the year. In this space we believe they are right.
Among the analysts who lead the most optimistic side is one of our favorites and the most accurate, Michael Hartnett, from Bank of America (BofA), who sees several signs that could herald a temporary rebound in risk assets before the end of 2023 .
The first indication it points to is the evolution of the Bulls and Bears Indicator prepared by BofA itself based on surveys among institutional fund managers. This index, which measures the predominant sentiment on Wall Street, hit a floor of 1.4 points last week, the lowest record since November of last year, thus configuring a “buy signal” of opportunity for the third consecutive week given the cheapness of prices.
According to Hartnett, this reflects excessive pessimism and poor positioning in stocks on the part of large investors, since – historically – when this indicator hits a low, the S&P 500 usually recovers strongly in the following months.
The fact is that, in the 12 weeks following the activation of said signal in the past, the US stock market in particular rose an average of a very attractive 6 percent.
Other technical indications that reinforce Hartnett’s optimistic reading for November and December are that oil has not managed to stay above $100 a barrel, despite multiple geopolitical hotspots that threaten supply; that the yields of US Treasury bonds have not yet pierced the psychological ceiling of 5 percent, and that the S&P 500 was able to rebound strongly after breaking below 4,000 points until returning to levels above $4,300.
For the BofA strategist, These elements configure a panorama in which there are no longer strong technical obstacles for a bullish rally of magnitude to occur in the coming months.possibly driven by a recurring year-end effect, when managers typically increase their bets on risky assets.
Hartnett sees specific potential in several cyclical and higher-leverage sectors that had been hit hard during the third-quarter correction, such as real estate investment trusts (REITs), banking, retail and small- and mid-cap firms.
Despite his optimism, he is more cautious regarding technological and high-growth assets, which in the last decade had been largely favored by excess liquidity and low interest rates.
2024: a recession is coming
Of course, it’s not all good news in Hartnett’s analysis. He in particular is concerned that oil has stabilized after rising 30 percent following the Israel-Gaza armed conflict, as he interprets this as an early sign that the world is approaching a recession. And so it is.
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Weighing all these factors, the strategist concludes that there is room for a new temporary tactical rally (rise) of magnitude to occur in the coming months, but that it would drown its strength prior to a collapse in 2024.
Therefore, that end-of-year fireworks would be just a mirage within a longer-term downward trend, he warns, given that in 2024 there would be a global recession with its inevitable financial volatility. He even predicts that by then unemployment in the United States would easily exceed 5 percent, causing great social unrest.
In this medium-term context, it recommends maintaining long positions in real assets that have historically benefited from high inflation environments, like gold, value and small cap stocksbanks and emerging markets.
Based on these observations, we advise our readers to temporarily assume risk positions in stock indices and cryptocurrencies, without leaving aside defensive positions in gold and dollars, in anticipation of a couple of years, 2024 and 2025, that would not be so good.
Editor’s note: This text belongs to our Opinion section and reflects only the author’s view, not necessarily the point of view of High Level.
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William Barba Master in Economics from the Austrian School; liberal, gold market specialist and editor of the investment newsletter Top Money Report