One of the most valuable pieces of trading advice I ever received was during the early days of my finance career in Hong Kong: “Emphasise price action over fundamentals, align your positions with the market, rather than opposing it. When price and fundamentals are in conflict, price wins.” 

The current price action of oil illustrates this point. Since the Israel / Hamas war began in October 2023, oil prices have fallen by -16 per cent. This price action suggests that markets may not be anticipating an escalation in this war.

Similarly, the price reversal after equities boomed in early November 2023 was swift and triggered many positive momentum indicators, bringing many indices close to regaining their all-time highs. 

Investors, however, continue to remain cautious and are concerned about downside risks for the year. The war shows no end in sight. China’s economy continues to weaken, starting the new year with a sharp drop as manufacturing activity contracted further in December to the lowest level in six months, while home sales continued to be weak. Moreover, this year will see elections in at least 64 countries 46 per cent of the world’s population and nearly 80 per cent of the world’s stock market capitalization. It commenced with Taiwan this past weekend, followed by India in the spring, and ending with the most pivotal of all, the United States.  These closely contested elections, carrying significant geopolitical implications, are poised to magnify uncertainty in financial markets.

Meanwhile economists have firmly embraced the soft-landing narrative, a stark contrast to their universal bearish outlook and recession predictions last year, which didn’t happen.  

Leading economic indicators (LEIs), forward looking economic data that is used to gauge the future state of the economy, have been consistently negative in the US, and from Bloomberg analysis we can see that:  

• LEIs declined 12 per cent over the course of two years. There has never been this deep of a decline without a recession.
• LEIs declined for 20 consecutive months. This has never happened without a recession.
• LEIs declined year on year by -7.6%. There has never been this deep of a decline without a recession.

And yet, recession did not materialise. If you’re in this game long enough, you see every indicator eventually lose its usefulness. While we may get an economic slowdown this year, a deeper recession does not seem to be in the cards. 

Investors’ cautiousness can be seen in recent money flows. According to Strategas investment research, US ETFs pulled in 388 billion US dollars last year, but money market vehicles, the most boring investments possible, pulled in over 1.1 trillion US dollars. There is currently over four trillion US dollars on the sidelines in cash, an all-time high. Many investors continue to hedge downside risk from a recession. No one I talk to is anticipating a strong year for equities.

The leading story of 2023 was how the Magnificent 7 drove all of the returns of the S&P500 index. But this changed after the end October low, as the rally broadened to the other sectors. The rally has broadened to include an extremely high percentage of stocks moving up together, which is how many sustainable rallies begin. This broadening has been so widespread that it has triggered a large number of momentum buy signals, all of which have bullish implications for this year’s stock market performance. Below are three of the strongest ones:

1. 70% of the US market was at 20-day highs. This is a rare signal, telling us that the broader market is in line with the gains made by the index (i.e. it’s the opposite of a narrow market led by the Magnificent 7).  
2. A stock index making a record high generally makes investors nervous. However historically when equities make a new all-time high, out of the last 70 years, 13 out of 14 times they’ve gained a median of 13.4% one year later.  The single loss was the all-time high in 2007 before the Great Financial Crisis.
3. The percentage of stocks above their 50-day average hit 87.8%, almost at the 90% threshold. Readings above 90% have had a mean return of +8.47% a year later, with no down years.

In rare cases when momentum is as strong as we have witnessed, median returns have been at least twice the long-term average up to a year later. All this indicates that in the short-term equities are very over-bought, and a pullback would be normal. More importantly they also suggest that 2024 will be a better year for equity performance than most investors expect.

The writer is head of investments for Singapore at AlTi Tiedemann Global. The views and opinions expressed in this article are solely the author’s and do not reflect the views or positions of AlTi Tiedemann Global or its subsidiaries. This content is intended for informational purposes only and should not be considered as financial advice.