It's been over a year, and I've maintained a positive stance on the US and Indian equity markets. I'm not a perma bull; when facts change, I'm willing to turn bearish. For the immediate future, I remain bullish.
Throughout this period, we faced inflation concerns, a banking crisis, recession fears, geopolitical issues, and the outsized influence of a few tech stocks on the market. Moreover, there was the constant threat of additional interest rate hikes.
Despite these challenges, the benchmark index S&P 500 has risen by approximately 25% since its October 2022 low and 16% year-to-date. The tech-heavy Nasdaq, driven primarily by demand for AI-related stocks, has fared even better, registering about a 34% increase since December 2022.
One significant reason I'm more bullish on the market is the prevailing bearish sentiment towards equities. A fundamental principle of contrarian investing is to bet against general consensus and extreme sentiments. Many hedge funds are currently underweight on the index. Hedge funds aim to create alpha by outperforming the index. If the index begins to ascend and hedge funds are underweight, they'll be compelled to purchase.
Currently, around $5 trillion is invested in money market funds, the highest since 2020. This surge is largely attributed to the increased interest rates offered by the Fed. Investors can earn a 5% return on a money market fund with negligible risk. This is enticing, especially when banks offer minimal interest, and investors must also account for the bank's credit risk. The rise in money market funds signifies that investors are shifting away from stocks, preferring safer yields over capital gains. Such behavior is a hallmark of market apprehension. When money market investments peak, especially when a subsector reaches an all-time high, history shows that a stock market boom usually follows. This trend was evident in 1990, 2002, 2008, and 2020.
With real rates in the positive and significant reductions in inflation, the Fed will likely acknowledge its adequate interventions and hold steady. Market players should remain alert to any fresh comments from Fed officials or any shift in their tone. Historically, during its rate hikes since the 1970s, the Fed has never sustained peak rates for more than nine months. A rate reduction by mid-2024 seems probable.
Additionally, since 1950, no 12-month period following a midterm election has seen stocks decline. I've pointed this out before. This trend continues. On November 8th, following the midterm election, the S&P 500 opened at 3,750. It now trades around 4,450, marking about a 19% increase over ten months. The most impressive 12-month post-midterm election surge occurred under President Kennedy in 1962, with stocks rising by 31%.
Currently, we're in the midst of the so-called "NVIDIA revolution." AI is an incontestable trend, and major software manufacturers are vying for NVIDIA's H100 GPUs to construct and train their AI models. NVIDIA's H100 is a sophisticated device, weighing approximately 70 pounds and containing about 35,000 components and nearly one trillion transistors. NVIDIA collaborates with an array of suppliers and testing firms to source components and ensure each unit functions optimally.
While NVIDIA currently leads the market, competitors like AMD might soon challenge its dominance. All in all, I foresee a favorable turn of events for equities, given their recent subdued trading.
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Abraham George is a seasoned investment manager with more than 40 years of experience in trading & investment and multi-billion dollar portfolio management spanning diverse environments like banks (HSBC, ADCB), sovereign wealth fund (ADIA), a royal family office, and a hedge fund.