Markets caught between a rock and a hard place

As we approach the final two months of what has been a tumultuous year for financial markets, one must wistfully wonder if the traditional Santa rally for the equity market will be back in 2023.

Well, we live in hope.

Given the uncertainties overhanging the market – elevated inflation, higher interest rates, heightened geopolitical risks and slowing growth in key Western economies – the prognosis is not great.

Anyone hoping for a market recovery should look towards the middle of 2024.

Despite the 10-year US Treasuries pulling back slightly towards the end of last week, this key benchmark remains just off its 5 per cent peaks.

This means investors are better off – at least for now – parking their funds in risk-free money market opportunities and deposits, rather than volatile equities.

On Wall Street, the Dow Jones Industrial Average closed at its lowest levels since March as it gave up another 2.14 per cent for the week to 32,417.59 on Friday.

The S&P 500 had its worst month in 2023 as it broke below its 200-day moving average and joined the Nasdaq index in correction territory, sliding another 2.53 per cent last week to its Friday close at 4,117.37 points.

Disappointing results from several Big Tech companies like Meta took their toll on the Nasdaq, which retreated another 2.62 per cent for the week to 12,643.01 points.

In Singapore, the Straits Times Index (STI) continued to gyrate between its 2,970 support and 3,150 points upside resistance to end the week 0.5 per cent lower at 3,061.85 points.

The Singapore market benchmark index is down 4.8 per cent on the month. Meanwhile, the SPDR Gold Shares ETF is up 6.3 per cent in Singdollar terms.

Singapore Exchange data suggests S-Reits, banks and real estate plays saw some of the biggest institutional outflows last week, while industrials, telcos, technology and consumer cyclicals booked the most net institutional inflow.

Interestingly, five non-STI stocks – ComfortDelGro, UMS, AEM, Frencken and Golden Agri-Resources – seem to have found favour with investors in 2023, booking almost $200 million in net institutional fund flows and delivering average total return (which includes dividends) of about 11.5 per cent for the 10 months to end-October.

Over in the United States, the latest numbers for the world’s biggest economy continued to confound, as gross domestic product

expanded by 4.9 per cent in the third quarter

(versus estimates of 4.5 per cent), boosted by strong consumer spending.

Core personal consumption expenditure (PCE), which the US Federal Reserve uses to measure inflation, edged 0.3 per cent higher in September.

On a year-on-year basis, the core PCE rose 3.7 per cent, which is still much higher than the Fed’s 2 per cent target.

All in all, it is a mixed picture for anyone trying to second guess what the Fed will do next. Despite rates remaining high, the US economy had its best showing in two years. And prices are not rising as sharply as feared.

Currently, the market is still betting that the US central bank will hold rates at its upcoming meeting this week and relook the matter in December.

The biggest concern for investors at the moment comes from geopolitics.

The conflicts in Ukraine and the Israel-Hamas war in the Middle East have the potential to send energy and commodity markets into a tizzy. A widening war in the Middle East could trigger oil sanctions, which could push oil prices beyond US$100 per barrel – a prospect that would be disastrous for the already-fragile global economy. 

The knock-on effects on corporate earnings – which are already under pressure from higher borrowing costs – could also be very painful.

Geopolitics and inflation aside, another factor that could impact market sentiment in November is a potential debt ceiling fight on Capitol Hill.

The US government recently posted

a US$1.695 trillion (S$2.32 trillion) budget deficit

in fiscal 2023, a 23 per cent jump from the previous year as revenue fell and outlays rose, not helped by record-high interest rates.

JPMorgan’s chief executive Jamie Dimon succinctly described the situation two weeks ago when he said this might be the most dangerous time the world has seen in decades.

However, others like Mr Steve Cohen remain sanguine. The hedge fund billionaire believes that stocks will rebound after a “fake recession”, a term increasingly used by folks who see a resilient US economy propping up the rest of the world.

So what can investors look forward to in the next two months?

Mr Vasu Menon, managing director for investment strategy at OCBC Bank, reckons volatility and uncertainty will remain fixtures if there are earnings downgrades in the event of a US recession.

But he sees the outlook for markets starting to improve in the latter half of 2024.

“A key question is whether earnings, which can drive stock prices, could help to provide markets with some support amid a slew of macro headwinds,” he said.

“The third-quarter earnings season is gathering pace and, so far, more than 70 per cent of companies in the S&P 500 index have reported results that have exceeded market expectations. While the short-term outlook seems challenging given continued uncertainties, the medium-term outlook is more promising.

“Bond yields could eventually fall in 2024, if inflation cools meaningfully due to a recession or a sharp economic slowdown in the US. In such an instance, the Fed could pivot to a dovish stance and even cut rates, which has historically been good for equity and bond markets,” Mr Menon added.

Indeed, some analysts see US Treasury yields pulling back in early 2024.

UBS, which has a reputation for being spot-on when it comes to this subject, projects that the 10-year US Treasuries will come down to 3.5 per cent by June 2024.

Mr Thilan Wickramasinghe, head of regional equities research at Maybank Securities, said that while US corporate earnings seem to have brushed aside inflationary pressures so far, investors in this region should also watch how Asian companies are doing as slowing demand in the West could impact revenues here.

“Energy prices remain high going into the northern winter and will prevent price pressures from fully dissipating,” he pointed out. “For investors, we advise keeping to a stance of staying defensive. Quality and earnings visibility are the key attributes to navigate markets towards the end of the year, in our view.”

One of the biggest opportunities offered by the Singapore market is dividend yields.

Singapore companies – and especially real estate investment trusts – generally pay generous dividends, and the recent pullbacks have made the yield outlook even more attractive on a 12-month horizon. It pays to do some homework.

Given the circumstances, it helps to have patience and nerves of steel. But as the motto of one of the world’s most renown commando units reads: “Who dares… wins.”

The biggest event this week will come on Thursday morning when the Fed meets to review its key interest rates.

Then there is the US unemployment data on Friday.

And Singapore retail sales numbers will also be released on Friday.