If you’d like to hear more, here’s another five minutes.
Starting with five thoughts on the Middle East.
oved sideways so far in early:
security has spiked in spring:
#3: Elevated geopolitical uncertainty/risk has become a feature of the post-COVID environment, but could weigh on sentiment. On the corporate side, references to geopolitics on public company earnings calls have been extremely high in recent years relative to their pre-COVID history. Companies have often emphasized their ability to manage through challenges, and we tend to see them describing the geopolitical backdrop as evolving, dynamic, unpredictable, and fluid. On Middle East tensions specifically, support for oil prices from Energy companies and boosted demand for hedging from Financials companies have also been discussed. We are eager to see what companies say about the weekend’s developments in coming days, but for now expect the “manage through” messaging to persist. We will also be monitoring how these latest developments in US foreign policy impact consumer confidence/sentiment (which has been stabilizing around extremely low levels in both the Conference Board and University of Michigan surveys) as well as public opinion polls (where voter approval on foreign policy has been extremely low).
ssia or the Middle East since:
#5: When it comes to stocks, it still may mostly come down to the oil market. There has been an inverse correlation of -40% between the S&P 500 and oil prices since COVID. But in our view, the key issue is not whether there is a short-term spike in oil prices. What’s more relevant to stocks, in our opinion, is whether a sustained impact to oil prices is seen, which is what we think would have more of a potential to damage confidence at various levels.
Wrapping up with a few general quantitative things we’re watching to help us gauge when the risk off phase we’ve started to see in stocks may be over.
First, sentiment. In the latest update net bulls on the weekly AAII survey fell to -6.6% on the weekly data point and 0.5% on the four-week average. The weekly data point is close, but not quite back, to one standard deviation below the long-term average, last seen in November helping confirm a bottom in the S&P 500 after a quick +5% drawdown. If another garden-variety 5-10% drawdown is underway (which we’ve been anticipating this year) or something even shallower, this may help us tell when the sentiment unwind has run its course. If a deeper pullback is starting, a return to 2-standard deviations below the long-term average will likely be an important milestone.
Second, we’ve seen some deterioration within the US equity category for US Large Cap, passive institutional flows, and blend flows. While some of the other categories we track have pointed to rotation from Growth to Value, trends in these categories are pointing to more of a derisking phenomenon underway.
w in the index in the fall of:
That’s all for now. Thanks for listening. And be sure to reach out to your RBC representative with any questions.
