Monthly Equity Market Update: What A Bounce

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Includes: ACWI, FM, HEWJ, IEMG, IEUR, SPY
by: FundGuru

Summary

Most markets have staged a strong rebound since our last coverage on March 1.

Emerging markets led the pack, followed by US, Europe, and Japan.

Could this be a dead cat bounce? Maybe.

For now, we are cutting back our short-term bullishness for US equity markets, but remain bullish on most other regions.

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I. Introduction

This is a monthly review of equity markets designed to provide investors an insight on nearer-term and longer-term market trends. All views expressed here are based on the short- and long-term price momentum of market indices relative to their own history.

The following indices are used as proxy:

  • Global Equity Markets: iShares MSCI All Country World Index ETF (NASDAQ:ACWI)
  • U.S. Equity Market: SPDR S&P 500 Index ETF (NYSEARCA:SPY)
  • European Equity Markets: iShares MSCI Europe Index ETF (NYSEARCA:IEUR)
  • Japanese Equity Market: iShares MSCI Japan Index ETF (NYSEARCA:HEWJ)
  • Emerging Equity Markets: iShares MSCI Emerging Markets Index ETF (NYSEARCA:IEMG)
  • Frontier Markets: iShares MSCI Frontier Markets 100 Index ETF (NYSEARCA:FM)

All data is as of close at March 31, 2016 and are in USD.

II. General Market Observations:

Since our last article titled "FG Market Momentum Desk: A Rally May Be In The Cards", a rally has indeed materialized.

Global equity markets, as measured by the MSCI All Country World Index (tracked by the ACWI), returned an astonishing +7.2% in March, the biggest monthly increase since October 2015. Since Jan 1988, the monthly return ranked 19 out of 339 monthly periods. The uptick is loud and clear on the longer term chart:

ACWI Total Return Price Chart

ACWI Total Return Price data by YCharts

Stock market rallies usually occur amid a subdued volatility backdrop. The volatility gauge, as measured by the CBOE VIX index, declined significantly in March and is currently sitting at 13.1:

^VIX Chart

That is a whopping -28% decline over the month.

The dollar has also taken a break against other major currencies, falling about 4% from our last review:

Real Trade Weighted US Dollar Index: Major Currencies Chart

Real Trade Weighted US Dollar Index: Major Currencies data by YCharts

There are some signs of improvement in the credit markets, with the OAS falling 60bps since March, suggesting positive returns for high yield bond funds:

US High Yield Master II Option-Adjusted Spread Chart

US High Yield Master II Option-Adjusted Spread data by YCharts

Gold prices have remained steady over the past month:

Gold Price in US Dollars Chart

Gold Price in US Dollars data by YCharts

III. Summary of Equity Market Views

Below is our current outlook on various markets. Last month's view is shown in brackets. Please note that our views are based on price momentum relative to history, and are not derived from an assessment of bottom-up valuations:

Asset Short-Term View:
3-6 Months
Long-Term View:
3-5 Years
Global Equity Markets Neutral (Bullish) Neutral (Neutral)
US Equity Market Neutral (Bullish) Bearish (Bearish)
European Equity Markets Bullish (Bullish) Bullish (Bullish)
Japanese Equity Market Bullish (Bullish) Neutral (Neutral)
Emerging Markets Bullish (Bullish) Bullish (Bullish)
Frontier Markets Neutral (Neutral) Neutral (Neutral)
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We are cutting back our near term bullishness for US and Global Equity markets after the recent rally.

Global Equity Markets

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Global equity markets are now roughly flat YTD (-0.3%), +4.4% over past 6 months, and +3.4% annualized over past 3 years.

Current short-term price momentum is hovering just above the mean (red line). Longer-term price momentum is neither elevated or depressed at current levels, based on history. Future returns may be weighed down by expensive valuations in the US market (half of global market cap), but offset by better returns in Europe and Emerging Markets.

US Equity Market

US equity markets rallied +6.6% in March, from oversold levels the month before.

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The S&P 500 is now in positive territory YTD (+1.2%), +7.5% over past 6 months, and +9.9% annualized over past 3 years.

Current short-term price momentum is approaching slightly overbought levels. Longer-term price momentum remains elevated.

We believe the market may struggle for direction in the coming months, given a combination of overvaluation and continued uncertainty over the Fed's rate hike path. We continue to advise investors deploy more capital overseas, and use any rally to cut back on US equity exposure.

European Equity Markets

European equity markets have followed other markets higher in March (+5.9%), although not by as much.

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The MSCI Europe Index remains in negative territory YTD (-3.2%), -1.1% over past 6 months, and have returned 0% annualized over past 3 years.

Current short-term price momentum is hovering around the mean (red line), so it is neither oversold or overbought. Longer-term price momentum is also neutral based on history.

We remain constructive on Europe in the short- and long-term given its discount to US markets, both in terms of relative returns and absolute valuations. Investors uncomfortable with investing in emerging markets should take a look at European equities.

Japanese Equity Market

Japanese equity markets returned +4.4% in March, bouncing a little from oversold levels.

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The market remains deep in the red YTD (-12.5%). It has returned -4.2% over last 6 months +8.6% annualized over last 3 years.

Current short-term price momentum is hovering just below the mean (red line), so it is neither oversold or overbought. Longer-term price momentum is approximately neutral based on history.

Emerging Equity Markets

Emerging market equities returned an astonishing +13% in March, exceeding all other public equity markets. The monthly return was the 9th strongest since January 1988.

The IEMG has returned +15.4% since our initial article titled "Emerging Markets: A Time Arbitrage Opportunity" in February:

IEMG Total Return Price Chart

IEMG Total Return Price data by YCharts

IEMG data by YCharts

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The MSCI EM Index is now +5.4% YTD, +5.6% over last 6 months but remains -6.8% annualized over last 3 years. It is still one of the worst performing regions over trailing 3 and 5 years.

Current short-term price momentum is hovering just above the mean (red line), so it is neither oversold or overbought. Longer-term price momentum remains very depressed, which is indicative of strong prospective absolute returns.

Although emerging markets have staged a strong comeback in March, we believe this is just the beginning. As such, we recommend investors take advantage of any pullback to buy into this asset class, and hold it for the long-term.

Frontier Markets

Frontier Markets include the equity markets of 23 less developed markets that have yet to graduate into the mainstream Emerging Markets Index. This includes Kuwait, Argentina, Nigeria and Pakistan. These markets returned +1.1% in March.

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Frontier Markets are down -2.5% YTD, -4.0% over past 6 months and -2.0% annualized over past 3 years.

Current short-term price momentum is hovering just below the mean (red line), so it is neither oversold or overbought. Longer-term price momentum is also neutral.

We are currently neutral on frontier markets as an asset class, due to lower liquidity, higher volatility, and higher corporate governance issues in these markets.

Summary Thoughts

Markets have indeed bounced back very quickly, with significant moves in many regions. Could this be a dead cat bounce? Maybe.

In our last article titled "Bear Market Investing: Brace Yourselves", we argued that the speed of decline is highly unusual, and may be a sign investors are once again getting too comfortably too quickly. Our advice to investors: invest cautiously and prepare for more market volatility and price swings ahead.

Disclosure: I am/we are long IEMG.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.