A Reluctant Bull Market

Leo Wealth

Harmen Overdijk, CFA

The global equity rally continued in February, with nearly all markets posting positive returns. The market gains are still very much driven by the tech sector, with semiconductor stocks posting 50 to 100% gains year to date.

Despite seeing new all-time highs in several markets, we have to keep in mind that equity markets trend up over time and by definition, we will see new all-time highs regularly.

To place this in context, although the S&P500 Index has set several new all-time highs this year, it is now only 6% higher than in January 2022, during which time the economy has grown significantly.

The Japanese Nikkei 225 Index also reached a new all-time high, but only just surpassing the level it hit 35 years ago.

We are seeing a big performance divergence between equity sectors, with the tech sector and some pharmaceutical companies outperforming by such a large margin that they are responsible for most of this year’s gains. Meaning that many other sectors are not performing as well.

After underperforming last year, Chinese stocks staged a sharp rally in February due to  increased support from Beijing for the stock market,  resulting in a policy-driven rebound.

We also saw a strong rally in Bitcoin and in gold, while price action in other commodity prices was muted.

The resilience of the U.S. economy and the higher-than-anticipated inflation readings led to a selloff in Treasuries,  causing fixed income to underperform in the past month. Investors scaled back their aggressive rate cut expectations for this year, bringing them more in line with the median dots in the FOMC’s December Summary of Economic Projections.

Favourable economic conditions should continue to provide a tailwind for equities. However, we expect global economic growth to soften later this year. While we do not expect a recession in the immediate future, markets will react nervously on any sign of economic weakness or higher inflation, leading to short-term corrections.

Does Inflation Lead Fed Policy?

Despite January’s strong inflation data, we remain confident that inflation will continue to fall this year. Falling new rents indicate that shelter inflation should head lower. This could take core inflation to below 2% later this year. January’s U.S. CPI number created a mini-shock wave that rippled across financial markets. Due to the stronger-than-expected consensus inflation number, investors now expect the Fed’s monetary easing cycle to start later, a stark contrast from expectations at the beginning of this year.

It is definitely possible that the Fed will only cut interest rates later this year, possibly only after the U.S. elections in November, as the Fed typically does not like to make major policy decisions just before Presidential elections in order to look political. A rate cut just before an election could boost an incumbent candidate’s chances.

However, the Fed does not look only at inflation but also at the strength of the job market as an indicator of future inflation. And the job market data is clearly softening.

Chairman Jay Powell indicated that the conditions for the first interest rate cut are falling into place. The Fed will likely either do a first-rate cut in May or otherwise wait till after the U.S. election and cut in November.

We have to keep in mind that the recent slightly higher inflation data is also a sign of economic strength. Therefore, we continue to favour risk assets for the foreseeable future. The start of the Fed easing cycle would definitely be a positive catalyst for equity markets.

Bond yields and the U.S. dollar should directionally head lower once the market begins to price a more aggressive easing cycle. As such, investors should stay overweight Treasuries and duration in global fixed-income portfolios.

The Trend in Equities is Intact

The January U.S. CPI report gave risk assets an excuse to correct without changing underlying macro trends. The downtrend in both price and wage inflation is intact, while labour productivity is improving.

A big recession remains unlikely, and signs are accumulating that an outright contraction could be avoided. Reliable macro leading indicators of recession are either improving or in a holding pattern. Jobless claims are falling. Consumer expectations are steady and small business optimism is improving.

The manufacturing recession is over, judging from the ISM survey. The January rebound in the new orders reading above 50 for the first time in 16 months was especially pronounced relative to inventories; which is a leading indicator the overall ISM manufacturing index.

Any sell-off in risk assets should be viewed as corrective in nature. Our strategic views are unchanged. The cyclical trend in equities is up.

Increasing Labour Productivity

Increasing labour productivity is one reason why employment remains strong while inflation is falling. Artificial Intelligence (AI) might not have the same impact as the Internet and Y2K IT infrastructure investments like in the 1990s, although a major productivity boom could certainly be disinflationary were it to occur. Although the impact is still to be seen, the progress with AI and other areas of technological development is ongoing, even though AI-related stocks have probably moved ahead of themselves and are likely in a bubble.


Year-to-date, the S&P 500 is up nearly 7% in total return terms, whereas the equal-weight version of the index has risen less than 3%. The difference between the two indexes is attributed to the impact of concentration effects, which have been sizeable since late 2022 when OpenAI launched ChatGPT. The chatbot program captured the imagination of millions and highlighted the progress made in large language models. Since the launch of ChatGPT, the S&P 500 has risen 27% in total return terms, whereas its equal-weight index is up only 11%.

NVIDIA is at the center of the outperformance of broadly defined tech stocks since the launch of ChatGPT, with the stock price having risen nearly fivefold since November 2022. NVIDIA is benefiting from an investment boom centered on generative AI, although a sizeable portion of NVIDIA’s graphics processing unit orders are coming from just three big tech companies.

Eventually, the equity rally should broaden. Big tech and some big pharma stocks are showing mania-like behaviour. Overshoots are typically driven more by psychology and liquidity than valuations, which already are expensive. Small caps and defensive, interest-rate-sensitive equity sectors offer diversification appeal given that it is impossible to time the end of overshoots.

China’s Growth Outlook

At the recent annual party congress China’s leadership announced that they expect to see 5% growth this year with a 3% inflation rate. Given the deflationary pressures in producer prices, we believe that the 3% inflation number will be difficult to reach and with lower inflation, it is likely that nominal GDP growth will also be lower.

Not that it matters for the equity markets. First, because current valuations are already reflecting very low confidence. And secondly because equity markets are not the economy. In fact, equity markets tend to perform better when economic growth is lower, as monetary and fiscal policies shift to a more stimulative stance.

A weak export backdrop and persistently tepid domestic consumption continue to constrain China’s post-Covid economic recovery. Consumer and business confidence remain depressed, per weak demand for credit in both sectors, and weak capital investment. China’s fiscal policy is not nearly pro-cyclical enough to spark a revival in the “animal spirits” required to reboot overall growth. Government spending needs to rise much more to improve China’s GDP growth outlook this year.

A Cheap Japanese Yen

The Japanese yen is the most undervalued G10 currency. Japan is still the only major country with negative interest rates and expectations are rising that the Bank of Japan (BoJ) might end the negative interest rate regime in their upcoming March meeting. That would definitely give a boost to the value of the Yen.

Japanese economic growth for the last quarter was revised higher and stronger employment data could give the BoJ another reason to change its policy.

Gold and Bitcoin

Both gold and bitcoin are showing strong rallies this year, likely driven by their attractiveness as an alternative store of value. There are signs that several central banks, including China’s PBOC, are increasing their gold reserves.

Bitcoin and other digital currencies profited from the launch of low-cost Bitcoin ETFs and the additional inflows they attracted. Although we think more inflows are likely and higher prices possible, the real value of digital currencies is still unclear as the practical application of Blockchain is still limited. Especially when compared to the applications of generative AI.

Portfolio Positioning

We keep a pro-growth tilt in our core portfolios with tilts towards NASDAQ, Japanese equities, and Chinese tech companies. In the Euro and Pound Sterling-based fixed income portfolios we increased duration further and added more local government bonds. In our commodity portfolios, we have taken some profit on Bitcoin and Ethereum positions, sold platinum, and have increased the position in energy.


The information provided is for educational purposes only. The views expressed here are those of the author and may not represent the views of Leo Wealth. Neither Leo Wealth nor the author makes any warranty or representation as to this information’s accuracy, completeness, or reliability. Please be advised that this content may contain errors, is subject to revision at all times, and should not be relied upon for any purpose. Under no circumstances shall Leo Wealth be liable to you or anyone else for damage stemming from the use or misuse of this information. Neither Leo Wealth nor the author offers legal or tax advice. Please consult the appropriate professional regarding your individual circumstance. Past performance is no guarantee of future results.

This material represents an assessment of the market and economic environment at a specific point in time. It is not intended to be a forecast of future events or a guarantee of future results.

Indices are unmanaged and investors cannot invest directly in an index. Unless otherwise noted, performance of indices does not account for any fees, commissions or other expenses that would be incurred.  Returns do not include reinvested dividends.

The Standard & Poor’s 500 (S&P 500) Index is a free-float weighted index that tracks the 500 most widely held stocks on the NYSE or NASDAQ and is representative of the stock market in general.  It is a market value weighted index with each stock’s weight in the index proportionate to its market value.

The Nikkei225, commonly called the Nikkei, is a price-weighted stock market index for the Tokyo Stock Exchange (TSE).  It has been calculated daily by the Nihon Keizai Shimbun (Nikkei) newspaper since 1950 and the components are reviewed once a year.

The Consumer Price Index (CPI) is a measure of inflation compiled by the US Bureau of Labor Studies.

The Institute for Supply Management (ISM) Manufacturing Index shows business conditions in the US manufacturing sector, taking into account expectations for future production, new orders, inventories, employment and deliveries. It is a significant indicator of the overall economic condition in US. The ISM Prices Paid represents business sentiment regarding future inflation. A high reading is seen as positive for the USD, while a low reading is seen as negative.

Smaller capitalization securities involve greater issuer risk than larger capitalization securities, and the markets for such securities may be more volatile and less liquid.  Specifically, small capitalization companies may be subject to more volatile market movements than securities of larger, more established companies, both because the securities typically are traded in lower volume and because the issuers typically are more subject to changes in earnings and prospects.

Securities of small and medium-sized companies tend to be riskier than those of larger companies. Compared to large companies, small and medium-sized companies may face greater business risks because they lack the management depth or experience, financial resources, product diversification or competitive strengths of larger companies, and they may be more adversely affected by poor economic conditions. There may be less publicly available information about smaller companies than larger companies. In addition, these companies may have been recently organized and may have little or no track record of success.

Diversification does not guarantee a profit or protect against a loss in a declining market.  It is a method used to help manage investment risk.

Investing internationally carries additional risks such as differences in financial reporting, currency exchange risk, as well as economic and political risk unique to the specific country. This may result in greater share price volatility. Shares, when sold, may be worth more or less than their original cost.

Cryptocurrency is a digital representation of value that functions as a medium of exchange, a unit of account, or a store of value, but it does not have legal tender status. Cryptocurrencies are sometimes exchanged for U.S. dollars or other currencies around the world, but they are not generally backed or supported by any government or central bank. Their value is completely derived by market forces of supply and demand, and they are more volatile than traditional currencies. Cryptocurrencies are not covered by either FDIC or SIPC insurance. Legislative and regulatory changes or actions at the state, federal, or international level may adversely affect the use, transfer, exchange, and value of cryptocurrency.

Purchasing cryptocurrencies comes with a number of risks, including volatile market price swings or flash crashes, market manipulation, and cybersecurity risks. In addition, cryptocurrency markets and exchanges are not regulated with the same controls or customer protections available in equity, option, futures, or foreign exchange investing.

Investments in commodities may have greater volatility than investments in traditional securities, particularly if the instruments involve leverage. The value of commodity-linked derivative instruments may be affected by changes in overall market movements, commodity index volatility, changes in interest rates or factors affecting a particular industry or commodity, such as drought, floods, weather, livestock disease, embargoes, tariffs and international economic, political and regulatory developments. Use of leveraged commodity-linked derivatives creates an opportunity for increased return but, at the same time, creates the possibility for greater loss.

Exchange Traded Funds (ETF’s) are sold by prospectus. Please consider the investment objectives, risks, charges, and expenses carefully before investing. The prospectus, which contains this and other information about the investment company, can be obtained from the Fund Company or your financial professional. Be sure to read the prospectus carefully before deciding whether to invest.

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