Just when investors thought dark clouds seeded by the Fed would dissipate before the end of the year, Jerome Powell and his fellow governors continued to rain on the parade instead, as they made it clear rates would be held higher for longer, thereby watering down expectations of rates easing in 2024.
In response, global equity indices pulled back, especially the higher beta, more volatile growth tech stocks that have led the US markets this year. Equity engines turned negative, and even the initial pop enjoyed by Arm following its IPO has deflated a tad along with the broader market.
In hindsight, the near-mania in which artificial intelligence plays are being chased after, driving broad swathes of the tech sector thus far this year, may lose more momentum eventually.
While some parts of generative AI are nice, investors realise they are not all monetisable. Nvidia, which led the charge, may not be the El Dorado that investors have been looking for, prompting quite a few to take some profit from what they’ve already gained.
The “sell-off” was muted — if one could even call it that. A 3% dip in the S&P500 still leaves it about 12% higher for the year, or a 4% decline of the Nasdaq keeping it head and shoulders above many other equity indices at a gain of 27% year to date. For those anticipating a panic, well, it hasn’t happened yet.
Perhaps markets were looking for an excuse to lock in gains eked out thus far this year. The Straits Times Index (STI), too, had its false break up in the middle of September to 3,280 points, above a trio of 50-, 100- and 200-day moving averages, and promptly fell on its behind, finding solace just around 3,200. It lacked conviction and momentum, but neither were sellers out in force.
We are now entering October. Market historians will remind us more than we need that “Black Octobers” occurred in 1929, 1987 and even 2008. Indeed, nine of the top 20 single-day percentage declines of the Dow Jones Index occurred that month. Were the investors lighting up a tad to keep some powder dry, just in case? Will 2023 be another year waiting for a crash to pick up bargains? What if it doesn’t happen? Will fund managers chase a November rally in case the year finishes even better to avoid looking embarrassed with risk-averse portfolios in cash when the markets have run?
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For those generally nervous, it is good to recall Mark Twain, who learnt by experience the dangers of speculating in stock markets. October “is one of the peculiarly dangerous months to speculate in stocks. The others are July, January, September, April, November, May, March, June, December, August and February.” If one were to try to time the market and stay out of impending turbulence, then perhaps it’s better not to get on the plane at all.
While October, for the number crunchers, maybe one where there have been more “co-incident” spectacular market crashes, at least for the studies on the S&P 500 and the Dow, September, August and June are statistically more likely to generate a negative return. Selling before the summer evaporation of liquidity by May has been more consistently rewarding than bracing for October.
The paradox of the STI
Our steady-as-it-goes local index, hovering between 3,100 and 3,400 since the Fed tightening cycle started last year, has perhaps performed as such for a reason. It isn’t so much that our potpourri of local Temasek-linked stalwarts and regional consumer plays are more or less exciting than others than their dividend yield on aggregate around 4%. Approximately 43.5% of our stock index comprises DBS Group Holdings, Oversea-Chinese Banking Corp and United Overseas Bank U11 . Add Singapore Telecommunications, and they are half the market.
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The attempts to head past 3,400 each time the broader market has rallied on speculation that the Fed has reached peak rates or will move towards cutting gradually or aggressively (hope springs eternal) in 2024, or now maybe none at all with “higher for longer” the mantra for the recent profit taking bout has faltered as investors view this as negative for banks with strong competitive positioning, which have been beneficiaries of a higher rate environment. So, the banks ease up by rotation, and the index flatlines and retreats.
Conversely, when the street turns to anticipate a more hawkish Fed, it is interpreted as positive for banks. So, any sell-off in the broader market gets buffeted by banks looking cheaper as the index tracks down. This almost becomes an “automatic stabiliser, “ providing respite whenever we head below 3,200.
Thus far, our thesis in Chew On This on Feb 2, that 2023 required a bit of “Kung Fu Hustle” to take profit and recycle wins in the local market, has played out. By sticking to the blue chips and rotating amongst them, investors could have eked out some dividends that were, on average, higher than Singapore Government Treasuries and with low volatility equity risk extracted alpha.
Of course, the trick is to do this consistently and not be drawn into pro-cyclical buying on the up and selling on the down, which isn’t easy, even if the overall flight path is smooth. For those who should do a Mark Twain and stay out of the market, the STI plus dividend return again outperforms cash if the last quarter of the year does repeat the first three quarters. When will both engines be firing at the same time?
It’s the economy, stupid
This phrase, “It’s the economy, stupid”, was attributed to James Carville, Bill Clinton’s strategist, who successfully engineered his election victory in 1992. Whilst it may have worked with politics, it should matter to markets — after all, that’s where economic return in a rational world should determine the prices of commodities or stocks.
Unfortunately, the theory doesn’t hold in real life, especially in the short term, either because behaviourist collective greed and fear creep in to exaggerate speculative moves, or market structure gets in the way or engenders boom and bust, for instance, through rules around margin finance and information asymmetry and technology.
In the short term, there is a lot of noise, and any disconnect with markets and economic reality is normally explained away as investors “discounting” already anticipated news, or “pricing in” the forward expectations well before, or simply technical traders swooping in sometimes making stock charts self-fulfilling.
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I assess that there is no perfect way (just a host of models which work until they don’t) to discount the future — despite the best feng shui market consultants or stock market (astrological) chartists, it is worth keeping an eye on the economy.
Perhaps, if it fails to pan out, one can have a rational reason to say, I got that right or wrong. Some anticipation is necessary, considering that if everyone has the same information and assesses similarly, they will only be on the same side of the trade.
So, what are some leading indications that are worth bearing in mind? The US economy seems stronger than anticipated, but that had appeared incongruent with the export slumps not only in China but also in most Asian exporting countries.
Singapore’s imports and exports suffering double-digit falls in August was not comforting to those hopeful of a global recovery following the pandemic. Is China the drag? Or are they just undergoing the painful adjustment of Western friendshoring and weak external demand?
The disconnect between the Fed’s needs to keep rates high, moderate inflation and cool the economy and the rest of the world already in an export slump could be explained as follows. Destocking of inventories may have met demand thus far.
This is coming to an end in some sectors. South Korea’s chip exports have been seeing double-digit declines for several months. That decline has slowed up and may have bottomed last month. Anecdotally, some manufacturing businesses that were writing off 2H2023 when orders upstream for Thanksgiving and Christmas did not come in by July appear to have had some September positive surprises announced.
If the Fed remains higher for longer, curating the Goldilocks of not too hot too cold, no US recession scenario, with inflation gradually under control, and real wages which have lagged gradually adjust up, recovering and turning positive, then we might have the conditions for cyclical recovery amongst our growth stocks in tech manufacturing and industrials in coming quarters, coupled strong banking profits continuing — with limited NPL’s, with a stable domestic economy and asset prices (excluding COEs).
If this transpires, the curious case of the STI may ride out in 2023, with both engines firing for 2024. In the meantime, Chew On This may be taking a couple of holidays — first to France to see how dire the European economy is amidst the Rugby World Cup, and then to Japan to see if we should close out our dark horse call for the year which has more than offset any depreciation of the yen.
Assuming no turbulence, I am glad my Singdollar dividends will go much further on these two trips, with the weak Euro mirroring its economy. That is one clear positive in investing at home.
Chew Sutat retired from Singapore Exchange S68 after 14 years as a member of its executive management team. During his watch, the exchange transformed from an Asian gateway into a global multi-asset exchange, and he was awarded FOW’s lifetime achievement award. He serves as chairman of the Community Chest Singapore
