Pro Perspectives 1/20/23

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January 20, 2023

As we end the week, let's take a look at a few charts.

First, here's a look at U.S. stocks …

As you can see this big technical trendline we've been watching, still holds. This is the trend that defines the bear market of last year. Interestingly, the last two tests of this line coincided with two very important inflation reports.

Stocks failed into this line both times, despite the improving inflation picture from both reports. Why? It was largely because the Fed went on the offensive immediately (against potentially easing financial conditions). They were quick to combat improving sentiment in markets with more threats of higher interest rates.

That said, it looks like we will get another test of the trendline in stocks next week.

Meanwhile, if we look at the bond market, the big trendline here has broken (in yields) …

For the better part of the past thirteen years, we've been used to seeing yields plunge/bonds soar on the view of (more) emergency monetary policy coming and/or heightened fear (i.e. safe haven flows into bonds).

In the current case, after the 60/40 bond portfolio had the worst year on record, the world is pouring money into bonds to start the year, both to capture the best yield in a long time, and also seeking bond price appreciation. Bond returns and bond sales are off to the best start to a year ever.

Finally, let's take a look at Chinese stocks …

It was in June of last year that things appeared to be opening up in China, and the economy was in an upswing, and then by July another wave of infections hit, and the government went back to lockdowns. You can see in the chart above, the ETF that tracks large cap Chinese stocks (symbol FXI) broke to new lows.

Now we have a number of catalysts working in favor of Chinese stocks, including a number of monetary and fiscal stimulus measures over the past several months. Then the government scrapped its zero covid policy. And now it appears they are relaxing restrictions on their real estate market. Stocks are moving.

On China, as we discussed in my Jan 5 note, "a faster rate of change in foreign interest rates, relative to the U.S., means money will move out of the dollar (weaker dollar).

For those searching the world for value, with a catalyst, it can be found in emerging market Asia. If history is our guide, this is likely where we will see the best stock market performance in the world over the next few years."

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