Will the 2023 rally run out of steam?

Investors could be trapped in the bear market

Many of the worst performing markets over the past 12 months have been in tears so far in 2023, with equities and cryptocurrencies in particular holding significant ground.

Exchange-traded products (ETPs) that track bitcoin and ethereum had a strong start to the year, with cryptocurrencies up 36.3% and 29% respectively, while their rise helped ETFs thematically tracking the crypto sector to generate double-digit year-to-date returns. .

Leading the way was the Global X Blockchain UCITS ETF (BKCG), which returned 69.4% YTD, followed by the VanEck Crypto and Blockchain Innovators UCITS ETF (DAGB), which returned 63.3%, according to JustETF.

Elsewhere, the HANetf Grayscale Future of Finance UCITS ETF (GFOP) and the WisdomTree Blockchain UCITS ETF (BKCN) returned 49.8% and 43.8% respectively.

Other themes also flourish. Electric vehicle stocks have rallied with poster boy Tesla up 58.8% year-to-date, while shares of electric vehicle developer Faraday Future Intelligent Electric are up 200% at the end of the year. news of the release in April.

Despite the stellar returns, many of these commodities are still licking their wounds after a harsh “crypto winter” and a sell-off in tech stocks, remaining significantly down longer term.

Athanasios Psarofagis, ETF analyst at Bloomberg Intelligence, said that while the crypto has seen the biggest turnaround by far, the overall trend points to a rally in stocks that were beaten last year.

“Crypto has had the biggest turnaround by far, but there is definitely a relationship between the underperformers doing the best this year,” he said. “Investors will always have a slight shortfall case on the upside and with some of them [crypto markets] being at 80%, it seems like a valid bet.

However, the question on investors’ minds will be how long the rally can last, given that most anticipate a recession at some point this year.

A bear market trap?

Russ Mould, chief investment officer at AJ Bell, said investors should remain cautious, with much of the rebound attributed to signs that inflation has peaked and expectations of lower interest rates towards the end of the year.

“As the old market saying goes, investors still have to coolly assess whether this is truly the start of the next bull market or just another nasty bear market trap that will catch the unwary and inflict more pain on them. “, did he declare.

“Caution may be necessary for two other reasons. First, it is very unusual for previous bull market leaders to be market darlings a second time, people lose faith in them because they lose so much money there.

“Second, these rallies could be just the last bear market trap – and bear market traps hurt. Nasdaq rallies.

A recent note from JP Morgan also suggested that the market rally so far this year may be short-lived.

He said recent inflows into equities will “likely run out of steam” due to lower anticipated earnings expectations and a rotation into bonds.

“The recent weakening of economic data and an anticipated drop in earnings expectations and weak full-year 2023 forecasts indicate that markets are set to turn lower, in our view,” said Marko Kolanovic, chief market strategist at JP Morgan.

“Recent inflows into equities are likely to run out of steam, while pensions’ overfunded status could lead to an increase in their reallocation from equities to bonds this year.”

He added that a recession is “not currently priced into equity markets”, with European equities and US industrials flat on the year, “as if the energy crisis, war and monetary tightening don’t had not happened”.

According to Peter Garnry, head of equity strategy at Saxo, markets hit the buffers later this week with tech giants Apple, Amazon and Alphabet all reporting their fourth quarter results on Thursday.

Investors will also be watching the Federal Reserve later this week and Saxo said it could be possible for the Fed to “surprise on the hawkish side” as markets continue to assess a possible rate cut campaign later this year. .

“The Fed continues to oppose the market’s expectation of a possible rate-cutting campaign set to begin later this year, and it may attempt to somehow surprise the hawkish side after especially the latter part of the Fed’s ‘higher for longer’ message was ignored,” he said.

“What does that look like? Hard to say: a 50 basis point move would be bold but would be a deep shock to the markets.

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