“We have moved away from the recession that was the markets’ main and greatest fear at the start of the year,” says David Kruk, Head of the Trading Desk/Intermediation at La Financière de l’Échiquier (LFDE), in his latest update on the latest market buzz.
But the power and speed of such an unexpected rebound, which began in early April, has raised many questions. The LFDE trader remains amazed by the behaviour and resilience of retail investors in the United States. “These savers have never lost confidence. They have been buying at every trough in the market. Once again, they were active players in the latest rebound.
With and thanks to their impetus, these investors gave power and duration to this rebound. Statistics show that retail investors accounted for up to 36% of equity trading volumes in May, further confirming their role as active players in every rebound from market lows in recent quarters. However, the power and speed of the latest rebound must have come as a surprise to more than one hedge fund. They were mostly positioned as short sellers with the prospect and fears of a recession. It should be noted that Goldman Sachs has reassessed US growth from 0.5% to 1%, and has also raised its target for the S&P 500 to 6,500.
It is important to take account of the presence of companies in the market’s purchasing volumes. This remains an important factor in the buyback of their own shares in the United States, valued at one trillion dollars.
US deficit, the stone in the shoe
According to a regular survey of managers commissioned by Bank of America, 62% of decision-makers are still concerned about the price war, compared with 15% about inflation. However, the tax cuts decided by Donald Trump’s team should amount to almost 5 trillion dollars over 10 years. This sum will have to be financed despite an already excessive deficit. The US deficit is likely to gradually return to the forefront of market operators’ concerns. The taxes raised by customs tariffs should contribute to future revenues, but would only represent half of the amount of the new tax cuts envisaged. Unless growth were to rise to 3%… but the latest economic figures do not point in that direction. Even if the positive surprises of the latest economic publications are on the way up.
As far as the bond market is concerned, it is mainly the speed of the rise in yields that is causing more concern than the level. The 30-year has passed the symbolic 5% mark again and 10-years are hovering around 4.5%. Note that US private investors, who are very active in equities, are absent from the bond market.
Europe is back
While the United States has to deal with an unpredictable president, Europe, which is more stable, has ended up becoming the preferred destination for brokers. This good news has been accompanied by a drying up of market outflows on the old continent since the start of the year. “I’m in favour of sharing equity investments fairly between the United States and Europe. The same reasoning applies to the split between large caps and small caps, with the latter possibly making a comeback. So it’s not too late to reconsider the place of small caps in portfolios on both sides of the Atlantic.
Finally, many institutional players seem to have missed the last rebound, and not all of them seem to be back on the train yet..
