Summary
Is this a new bull market or still an old bear?
This is likely a bear market rally, but we are close to the inflation catalyst. Bear markets have seen up to 11 ‘bear rallies’. This one is bigger than the 8% average, but still only the 4th. To be sustained we need a decisive fall in inflation, to ease Fed interest rate and recession fears. Lead indicators, from oil to supply chains give hope, but we need the actual data. We think the market bottom is in. Earnings are firm, valuations lower, sentiment poor. Stay invested but be defensive.
Markets hold off the Fed, for now
Markets resilient, on lower oil and OK Q2 results, even as Fed warned on complacency and jobs market still running hot. Resilient US PMI’ kept recession worries at bay even as Bank of England forecast a long UK recession, and China’ sabre rattled on Taiwan. TSLA approved 3:1 stock split. Democrats look to tax $1 trillion stock buybacks, the largest US equity buyer. See presentation, video updates, and twitter @laidler_ben.
More earnings relief, for now
Relief at ‘less-bad-than-feared’ Q2 earnings a key driver of market. Companies again proved adept at navigating a toxic mix of slower growth and rising costs. S&P500 earnings +8% with 75% over forecasts. But it won’t last forever.
Poor sentiment still a contrarian support
Capitulated sentiment also been a rally support. This support continues. Our contrarian investor sentiment indicator is still at similar levels to the 2020 ‘covid crash’ and 2008 global financial crisis, despite their more dramatic size.
Consumers not feeling all the oil price fall
Brent oil under $95/bbl., but refining bottlenecks stopping full pass to consumer. Price premiums for gas (Gasoline) and heating oil (HeatingOil) are double average. Helps refiners like Marathon (MPC) and Valero (VLO) for now.
Demographics is destiny
It is an increasingly big and predictable driver for investors, led by India and Africa.
Crypto holding on to strong recent gains
Crypto seen biggest rebound of all assets from June lows and held on to these last week. The rising integration with traditional finance (TradFi) growsas worlds no.1 fund manager Blackrock (BLK) offers to clients. MicroStrategy (MSTR) CEO, which holds 129,000 bitcoin, stepped down. Ethereum (ETH) Goerli PoW test due.
Commodities dragged down by oil
Brent oil slumped to a five-month low $95/bbl. as inventories built, and OPEC raised supply. Whilst precious metals, gold and platinum, were helped by more stable US dollar and bond yields. Etoro added 8 new physical commodities to platform, from soybeans to carbon credits.
The week ahead: All about US inflation
1) July US inflation report dominates otherwise quiet August week. Estimate small fall to 8.9%. 2) Wind down of Q2 earnings reports includes DIS, IHG, COIN, and WMG. 3) UK Q2 GDP report focus after very depressing Bank of England outlook for 13% inflation and long recession.
Our key views: Inflation versus recession race
Recession and earnings risk driving markets, with valuations slumped and bond yields peaked. Recession not inevitable, on resilient corporates and consumer, and easing price pressure. But recovery only U-shaped. Focus defensives, in ‘new’ world and to manage risks. Healthcare and high dividend yield, to UK and China.
Top Index Performance
| 1 Week | 1 Month | YTD | |
| DJ30 | -0.13% | 4.68% | -9.73% |
| SPX500 | 0.36% | 6.30% | -13.03% |
| NASDAQ | 2.15% | 8.79% | -19.10% |
| UK100 | 0.22% | 3.38% | 0.75% |
| GER30 | 0.67% | 4.29% | -14.55% |
| JPN225 | 1.35% | 6.26% | -2.14% |
| HKG50 | 0.23% | -7.01% | -13.66% |
*Data accurate as of 08/08/2022
Market Views
Markets fight off the Fed, for now
- Markets resilient, on lower oil and OK Q2 results, even as the Fed warned on complacency and jobs market still running hot. Resilient US PMI’ kept recession worries at bay, offsetting Bank of England forecast of long UK recession, and China’ sabre-rattling on Taiwan. TSLA approved 3:1 stock split. Democrats look to tax stock buybacks, the largest US equity buyer.
More earnings relief, for now
- Relief at ‘less-bad-than-feared’ Q2 earnings is a key driver of the market. With valuations down, earnings been a big market support. Companies proved adept at navigating a toxic mix of slower growth and rising costs. But won’t last forever.
- Over 75% S&P 500 stocks have beaten forecasts, and all sectors except communications. But earnings growth is slowly easing, with the US and global growth outlook slipping 1% to 8% in recent weeks, and markets in a race between between peaking inflation and lower profits.
Poor sentiment still a contrarian support
- Capitulated sentiment also been a support of the rally. This support continues. Our contrarian investor sentiment indicator (see chart) at similar levels to the 2020 ‘covid crash’ and 2008 global financial crisis, despite the more dramatic scale.
- These indicator lows have historically been long term buy signals, and echo Warren Buffett’s maxim to ‘be greedy when others are fearful’.
- Continued pessimism has been led by the S&P 500 put/call ratio that is well-above average, and by individual investor sentiment, with 40% outright bearish. Less dramatic is the VIX (VIX.FUT) volatility index, and mutual fund and ETF flows which have stabilized after a run of strong outflows.
Consumers not feeling all the oil price fall
- Brent oil prices fallen under $95/bbl as the demand outlook darkens, and recession fears rise. More supply has come from US reserve sales, whilst last week’ 100,000bpd OPEC addition was tiny but still welcome. This is all helping ease inflation fears.
- But refining bottlenecks are stopping a full pass to the consumer. Price premiums for refined products like gasoline (Gasoline) and heating oil (HeatingOil) are double average. These should fall as demand eases. But for now refiners, from Marathon (MPC) to Valero (VLO), and integrated oil producers, are benefitting over consumers.
Demographics is destiny
- The saying goes that ‘demographics is destiny’ and this is an increasingly big and predictable driver for investors. Latest global population forecasts show dramatic changes even just over the next few years. With economic growth in essence just population plus productivity per person, this is important stuff.
- This is a drag for Europe and north Asia but helps from healthcare to automation. A demographic dividend is on table for India and Africa, helping infrastructure to commodities.
eToro Composite Investor Sentiment Index* vs S&P 500
Crypto holds on to recent strong gains
- Crypto assets held on to strong recent gains, that seen asset class lead others up in recent weeks. Bitcoin resilient around $23,000 and +30% from June lows. The Ethereum (ETH) Goerli final test before September ‘merge’ planned for this week.
- Integration with traditional finance continues, with Coinbase (COIN) and Blackrock (BLK) partnering to offer crypto access to clients.
- Other news saw MicroStrategy (MSTR) CEO Saylor step aside. The company holds near 130,000 bitcoin, acquired for $4 billion. Also, digital payments firm Block (SQ), that pushed into crypto under Jack Dorsey, saw Q2 results hit by lower crypto demand and falling prices.
Commodities dragged down by oil
- The broad-based Bloomberg commodity index dragged down by a slump in Brent crude prices decisively below $100/bbl., to a five-month low.
- Oil weakness driven by sharp rise in inventories, a sign of weakening demand as high prices taken a toll. Also as OPEC+ agreed to modestly increase its production plans by 100,000bbls a day.
- A stabilizing US dollar and less competition from US bond yields gave relief to precious metals prices, with gold, silver, and platinum all rising.
- Etoro adds eight more commodities to platform, from gasoline to soybeans and carbon credits.
US Equity Sectors, Themes, Crypto assets
| 1 Week | 1 Month | YTD | |
| IT | 2.50% | 11.17% | -20.22% |
| Healthcare | 0.09% | 2.57% | -8.61% |
| C Cyclicals | 1.39% | 13.67% | -20.47% |
| Small Caps | 1.94% | 10.37% | -14.41% |
| Value | -0.56% | 4.76% | -9.21% |
| Bitcoin | -4.39% | 12.77% | -51.79% |
| Ethereum | -2.82% | 47.30% | -55.19% |
Source: Refinitiv, MSCI, FTSE Russell
The week ahead: all about US inflation
- July’s US inflation report dominates, with hope it supports market hopes for lower price growth ahead. See a small fall to 8.9%, after oil prices eased, but with focus on whether underlying trends are enough to calm the Fed.
- Wind down of US second quarter earnings season, includes DIS, IHG, COIN, WMG. S&P 500 earnings growth been better-than-feared 8%, with three-quarters of all stocks beating forecasts, and all-sectors ex communications.
- Q2 UK GDP (Thu) a focus in quiet mid-August week, after depressing outlook from Bank of England that faces stagflation combo of 13% inflation peak and long five-quarter recession.
- Last stretch of Ethereum (ETH) proof-of-work ‘merge’ with this week’s Goerli testnet dry run. Also Toronto’s Blockchain Futurist Conference.
Our key views: Recession fears in driving seat
- Saw biggest sell-off since the 2020 covid crash. Recession and earnings risk drive markets, with valuations slumped and bond yield peaked. See the fundamentals stressed but secure, with recession not inevitable, on resilient corporates and consumer. But recovery U, not V, shaped.
- Focus on cheap and defensive assets for now. To be invested in this ‘new’ world, for the coming recovery, but to manage still high risks. Sectors, like healthcare, defensive styles like div. yield, and related markets from UK to China.
Fixed Income, Commodities, Currencies
| 1 Week | 1 Month | YTD | |
| Commod* | -3.26% | 1.67% | 18.84% |
| Brent Oil | -8.98% | -11.66% | 21.45% |
| Gold Spot | 0.54% | 2.96% | -2.08% |
| DXY USD | 0.64% | -0.40% | 11.05% |
| EUR/USD | -0.42% | -0.04% | -10.46% |
| US 10Yr Yld | 18.28% | -24.98% | 132.06% |
| VIX Vol. | -0.84% | -14.16% | 22.82% |
Source: Refinitiv. * Broad based Bloomberg commodity index
Focus of Week: A new bull market or just a bear market rally?
This is likely a bear market rally, even though we are close to the falling inflation catalyst
The S&P 500 is up 13% from its June lows. The NASDAQ has gone even better, up near 20% from its lows, and close to the hypothetical threshold for a new bull market. This has been driven by a combination of capitulated investor sentiment, less-bad-than-feared Q2 earnings, and hopes for an inflation decline and end to the Fed rate hiking cycle by Christmas. Meanwhile the US Fed has implicitly joined the investor chorus saying the market has run too-far-too-fast. They are hating this market rally that is easing financial conditions – boosting equity markets to cutting mortgage rates. These had been doing much of the Fed’s job for it. We remain optimistic that we have seen the bear market bottom but cautious that this is the sustainable recovery that leads to the next bull market. That needs the inflation turn down we still await.
Bear rallies happen a lot, and this has been a big one – but this is not unprecedented
The chart below tracks the number and size of the 5%+ rallies in this bear market compared to the big three crashes before: in 2007, 2000, and 1973. Two things stand out. Firstly, the large number of bear rallies typically seen before the sustainable one arrives that starts the next bull market. This is the 4th, and some recoveries need 11. Secondly, the big size of this 13% rally versus the 8% average bear market rally. History says we have more false dawns ahead, and the size of this rally is big but not unprecedented.
To be sustainable we need to see a decisive turn down in inflation, to ease Fed and recession fears
To be sustainable this rally needs to see a sustained decline in inflation, that would lead to visibility on the end to this Fed interest rate hiking cycle, and a lessening of recession risks. We believe we are close to this inflation peak, with commodity prices falling, supply chains loosening, and labour market starting to weaken. But this needs to be crucially validated by a big fall in the actual data. We should start to see this with Wednesday’s July inflation report, but likely not enough to cool the Fed’s still hawkish rhetoric yet.
We do think we have seen the bear market bottom, but this is a U-shaped not V-shaped recovery
We think we have likely seen the US market bottom, but that it will be a more gradual U-shaped market recovery. Hope comes from the decline in inflation lead-indicators, resilient earnings estimates, now 10- year average valuations, and still very depressed investor sentiment. Whilst a bona-fide recession is not inevitable, with consumers and corporates still firm, and it would be mild if it comes. So, we are invested but in traditional defensive segments like healthcare and high dividend yield, plus similar markets like UK and China. Big tech benefits from its recession-resistant cash flows and the likely peak in US bond yields.
History of S&P 500 bear market rallies: number x magnitude
Key Views
| The eToro Market Strategy View | |
| Global Overview | Geopolitical risks alongside the Fed hiking cycle is boosting uncertainty and weakening markets. We see this as slowly fading, the global growth outlook secure, and valuations more compelling. Focus on cheap cyclical and defensive assets within equities, like Value, plus commodities, crypto. Relative caution on fixed income and the USD. |
| Traffic lights* | Equity Market Outlook |
| United States | World’s largest equity market (60% of total) seeing slowing GDP growth but still-resilient earnings growth. Valuations led market rout, and now at average levels, and are supported by peaked bond yields and high company profitability. Faster Fed hiking cycle is boosting recession risks. Focus on traditional cash-flows defensives, like healthcare and high dividend. Big-tech supported by structural growth outlook. See a gradual ‘U-shaped’ rebound as inflation falls. |
| Europe & UK | Favour defensive and cheap UK equities (‘Economies are not stock-markets’) over high risk/high return continental Europe. Recession risks high with Russia and energy crisis, threatening to overwhelm ‘buffers’ of rising fiscal spending (defence and refugees), low interest rates (slow to raise ECB), and weak Euro (50%+ sales from overseas). Equities partly cushioned by lack of tech, and 25% cheaper valuations vs US. Favour cheap and defensive UK over Continent. |
| Emerging Markets (EM) | China, Korea, Taiwan dominate EM (60% wt), and more tech-centric than US. Positive on China as economy reopens, cuts interest rates, and eases tech regulation crackdown. Valuations 40% cheaper than US and market out of favour. Recovery helps global sectors from luxury to materials. More cautious rest of EM on rising rates and strong USD. |
| Other International (JP, AUS, CN) | Canada and Australia benefit from strong equity market weight in commodities and financials, as global growth rebounds and bond yields set to rise. Japanese equities among cheapest of any major market and vaccination rates accelerating, but has structural headwinds of low GDP growth, an ageing population, and world’s highest debt. |
| Traffic lights* | Equity Sector & Themes Outlook |
| Tech | ‘Tech’ sectors of IT, communications, parts of consumer discretionary (Amazon, Tesla), dominate US and China. Expect more subdued performance as bond yields rise. But are structural stories with good growth, high margins, fortress balance sheets that justify high valuations. ‘Big-tech’ the new defensives. ‘Disruptive’ tech more vulnerable. |
| Defensives | Core positions as macro risks rise and bond yields are better priced. Consumer staples, utilities, real estate attractive defensive cash flows, less exposed to rising economic growth risks, and robust dividends. Offset impact of higher bond yields. Healthcare most attractive, with cheaper valuations, more growth, some rising cost protection. |
| Cyclicals | Cyclical sectors, like consumer discretionary (autos, apparel, restaurants), industrials, energy, and materials, are cheap and attractive in a ‘slowdown not recession’ scenario. Are sensitive to re-opening economies, resilient GDP growth, and higher bond yields, with depressed earnings, cheaper valuations, and have been out-of-favour for many years. |
| Financials | Benefits from higher bond yields, charging more for loans than pay for deposits. Also one of cheapest P/E valuations, and room for large dividend and buyback yields. But is being outweighed by rising recession risks, with lower loan demand and higher defaults. Banks most exposed. Insurance and Diversifieds (like Berkshire Hathaway) least. |
| Themes | We favour Value over Growth on GDP resilience, lower valuations, rising bond yields, under-ownership after decade under-performance. Dividends and buybacks recovering with cash flows. Power of dividends under-estimated, at up to 1/2 of total long term return. Secular growth of Renewables and Disruptive Tech themes. |
| Traffic lights* | Other Assets |
| Currencies | USD well-supported for now by rising Fed interest rate outlook and ‘safer-haven’ bid on virus fourth wave virus. This is likely more modest than prior USD rallies as rest of world growth recovers and virus fears ease. A strong USD traditionally hurts EM, commodities, US foreign earners, such as tech, but helps EU and Japan exporters. |
| Fixed Income | US 10-year bond yields to rise modestly as inflation above 2% average Fed target, ‘real’ inflation-adjusted yields negative, Fed to gradually tighten policy. Will be modest as inflation expectations already high, wide spread to other market bond yields, and structural headwinds of all-time high debt, poor demographics, and low productivity. |
| Commodities | In ‘sweet spot’ of robust GDP growth, ‘green’ industry demand, years of supply under-investment, recovering China, and Russia supply crisis. Industrial metals and battery materials well positioned. Oil helped by slow return of OPEC+ supply and Russia 10% world supply problems. Gold helped by risk-aversion but held back by rising bond yields. |
| Crypto | Institutionalization of bitcoin market barely begun, as asset class benefits from very strong risk-adjusted returns and low correlations with other assets. Clear supply rules a benefit as inflation high. Volatility still high, with the 16th -50% pullback of the last decade. Adoption and development continuing regardless. See Ethereum merge to Proof-of-Work. |
| *Methodology: | Our guide to where we see better risk-adjusted outlook. Not investment advice. |
| Positive | Overall positive view, and expected to outperform the asset class on a 12-month view. |
| Neutral | Overall neutral view, with elements of strength and weakness on a 12-month view |
| Cautious | Overall cautious view, and expected to underperform the asset class on a 12-month view |
Source: eToro
Analyst Team
| Global Analyst Team | |
| CIO | Gil Shapira |
| Global Markets Strategist | Ben Laidler |
| United States | Callie Cox |
| United Kingdom | Adam Vettese Mark Crouch Simon Peters |
| France | Antoine Fraysse Soulier David Derhy |
| Holland | Jean-Paul van Oudheusden |
| Italy | Gabriel Dabach |
| Iberia/LatAm | Javier Molina |
| Poland | Pawel Majtkowski |
| Romania | Bogdan Maioreanu |
| Asia | Nemo Qin Marco Ma |
| Australia | Josh Gilbert |
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