The Sandbox Daily (10.11.2022)
International Monetary Fund, $SPX and $NDX (near) roundtrips, semiconductor stocks, and investor psychology
Welcome, Sandbox friends.
Today’s Daily discusses the International Monetary Fund’s cut to its 2023 global growth forecast, near roundtrips on the S&P 500 and Nasdaq Composite, semiconductor stocks continue to deteriorate, and investor psychology throughout the market cycle.
Let’s dig in.
Markets in review
EQUITIES: Dow +0.12% | Russell 2000 +0.06% | S&P 500 -0.65% | Nasdaq 100 -1.24%
FIXED INCOME: Barclays Agg Bond +0.03% | High Yield +0.31% | 2yr UST 4.312% | 10yr UST 3.951%
COMMODITIES: Brent Crude -2.35% to $93.71/barrel. Gold -0.61% to $1,669.2/oz.
BITCOIN: -0.21% to $19,103
US DOLLAR INDEX: +0.20% to 113.442
CBOE EQUITY PUT/CALL RATIO: 0.65
VIX: +3.64% to 33.63
IMF warns inflation fight, geopolitical events driving up financial stability risks
Global central banks’ moves to quickly raise interest rates, in addition to elevated geopolitical events, have fueled increased risks to the financial system, the International Monetary Fund (IMF) warned Tuesday in its World Economic Outlook report. The risk of policy miscalculation – the disorderly tightening in financial conditions – has risen sharply as growth remains fragile and markets show signs of stress.
The IMF cut its forecast for global growth in 2023 to 2.7%, down from 2.9% reported in July and 3.8% in January, adding that it sees a 25% probability that growth will slow to less than 2%. Excluding the unprecedented slowdown of 2020 because of the coronavirus pandemic, next year’s performance would be the weakest since 2009, in the wake of the global financial crisis.
The economic outlook by region depends on a successful calibration of monetary and fiscal policies, softening aggregate demand to put inflation back in the bottle, supply and demand within the energy and commodity markets, and the strength of labor markets in the face of a likely recession.
“The worst is yet to come, and for many people 2023 will feel like a recession,” the IMF’s chief economist, Pierre-Olivier Gourinchas, wrote in a foreword to the report. “As storm clouds gather, policymakers need to keep a steady hand.”
Source: International Monetary Fund, Bloomberg
Roundtrips on the S&P 500 and Nasdaq Composite
Where is the S&P 500 and Nasdaq Composite in relation to the pre-COVID highs in February 2020? Well, they’re both still up, but the gains are quickly fading. It has now been just about two and a half years since the pre-COVID high for the S&P 500, and from that peak to today, the S&P 500 is up just +5.5% and the Nasdaq is up +5.6%. The market has nearly roundtripped its performance since the pandemic began.
Source: Bespoke Investment Group
Semis continue to deteriorate
The semiconductor industry is a valuable proxy for assessing the health of the global economy and equity markets worldwide. The importance of these companies cannot be overstated, as they produce the technology that drives the world economy. When semiconductors are trending higher, it tends to indicate that the market and overall economy are in good shape. However, when they are trending lower, the opposite is likely true. This is the present day case as semiconductor stocks continue to break down, which could suggest trouble for the broader market.
The chart above shows the VanEck Semiconductor ETF (SMH) posting its worst three-day losing streak since March 2020. That instance marked the lows of the previous bear market. Notice how it was followed by some very positive three-day stretches. For now, this negative momentum thrust is sending an ominous message to the market. If it is followed by extreme readings in the opposite direction though, it could be a sign of exhaustion.
Source: All Star Charts
Investor psychology
2022’s been tough going. It’s been a nightmare year to forget unless you’ve been heavily invested in the U.S. Dollar or Energy. So perhaps charting the post-pandemic market cycle into the stages of investor psychology may lend some perspective. Below is one illustration of how investors emotionally endure each part of the cycle.
What’s so interesting about investor psychology is that it doesn’t really change in the way that market cycles can change. It’s more or less consistent. Investor behavior, and our emotional response to seeing our accounts go up and down, doesn’t really deviate because of time or what’s driving the current market cycle. And specific to this moment in time, no textbook or chart can properly prepare someone for what the global population has had to endure for the last 2.5 years.
So where are we today? It’s up for debate. We won’t know until after the fact. Central banks are still hiking interest rates, inflation is remaining more sticky than almost anyone imagined, and geopolitical exogenous shocks remain a major risk. But here is one interpretation in which we overlay investor psychology to the present day S&P 500 index.
Source: HoneyStocks Charting
That’s all for today.
Blake
Welcome to The Sandbox Daily, a daily curation of relevant research at the intersection of markets, economics, and lifestyle. We are committed to delivering high-quality and timely content to help investors make sense of capital markets.
Blake Millard is the Director of Investments at Sandbox Financial Partners, a Registered Investment Advisor. All opinions expressed here are solely his opinion and do not express or reflect the opinion of Sandbox Financial Partners. This Substack channel is for informational purposes only and should not be construed as investment advice. Clients of Sandbox Financial Partners may maintain positions in the markets, indexes, corporations, and/or securities discussed within The Sandbox Daily.
So despair is still a long way to go??!?!