Is the stock market recovering? Let's take a closer look

So far this year, news about financial publications market trends has been quite positive. This may cause retail investors to believe that the downside risk factors have been reduced. This is after the return of a bull market that lasted nearly 5 years before the pandemic became global (and brief), and movement restrictions were lifted in the Kai region of the Western Hemisphere). However, optimistic estimates that the return of enthusiasm may be premature.

Jurrien Timmer (Jurrien Timmer), head of global macro at Fidelity, estimates that so far this year, profit margins seem to have borne the brunt of lower earnings expectations, so they fell from 13.7% to 12.2%. Even current valuations are considered high historical standards and are well above the past peak of fifteen years before COVID.

Timor further explained that while US earnings expectations have declined sharply, the rest of the world seems to be stabilizing. Emerging Market (EM) stocks were at the bottom earlier in the expected year-over-year change and are now flat.

This is by no means the opinion of a few. Most importantly, as an article from two weeks ago, most leading analysts believe India will lead the emerging market instruments that performed well this year.

The decline in US stock valuations is a rather interesting turn of events. Historically, US stocks have always been the most overvalued stocks in the world. This is due in large part to their extensive media coverage, and global investors have developed strong “brand memories.” Charles Schwab estimates that the expected return for the next ten years shows a bearish trend. Compared with the present, there are at least some signs of deflation in last year's 10-year forecast.

What did not match any recovery expectations was the US economy's contraction. The new data gives some idea of why the published unemployment figures do not seem to have increased compared to other economic indicators: since February 2020, small businesses have been supporting the labor market, employing 3.67 million more people than those who have been fired or quit.

However, unlike large firms, small businesses are more vulnerable to rising costs and inflation cycles. AllianceBernstein estimates that at least this quarter, inflationary pressure may remain high, and US GDP will be close to no growth, and US monetary policy is expected to remain tight throughout the year.

Relative to historical trends, consumption and investment in China are also estimated to fall — albeit not as drastically as in early 2022.

So how do you explain the moderately-positive market valuations this year so far? In addition to the little-known “January effect” last week), there is at least one other factor: money market capital inflows.

In the four-week period from mid-December 2022 to mid-January this year, investors injected nearly $135 billion into global money market funds (MMF), which is estimated to be the best period for money market funds since the four weeks ending in May 2020.

Throughout 2022, retail investors abandoned the US stock market and cashed out instead of continuing to hold the sky-high prices of popular stocks. However, with the arrival of 2023, MMF data shows that institutional professionals have quietly recovered, reaffirming their dominance in determining market investment trajectories. Given that IMF funds are required to establish positions based on clients who have invested in their funds, this buying activity has given some US stock markets momentum despite the neutral to bearish macroeconomic outlook.

In December, assets in money market funds reached a record $5.18 trillion, surpassing the all-time high of $5.16 trillion in May 2020. The average return of US money market funds this month (ending January 23) was 4.12%, the highest since the 2008 global financial crisis.

As in the previous week's article, the basic advice remains the same: current conditions remain the best conditions for realizing short-term profits from tactical trading, and exchange-traded products (ETPs) can easily provide this type of trade at a very economical and scalable cost. Among the products offered on the Tiger Securities platform, the two market preferences discussed were also the same as last week:

$SP5Y provides 5x risk exposure on the S&P 500 index, while $SPYS provides 3x risk exposure on the S&P 500 index on the negative side.
The risk exposure of $QQQ5 in the Nasdaq 100 Index is 5 times, while the risk exposure of $QQ3S in the Nasdaq 100 Index is 3 times unfavorable.