Global Equities: Not As Healthy As They Appear – August 10, 2020

While the global benchmark is approaching a high, beneath the surface there are some warning signs about equity market health that bear close monitoring, as discussed in a just-published report.

These signs include:

  • The darlings of this era, U.S. technology stocks, which have led the equity market rebound, are now overbought. This implies an increasing risk of a correction in the months ahead.
  • Global industrial sector stocks, normally a pro-cyclical sector, have struggled in relative terms following a big bounce from mid-May to early-June. In contrast, sector relative performance coming out of the 2008-2009 recession was stronger than at present, and was positive when global manufacturing activity accelerated in 2013-2014 and 2016-2017.
  • Global small-caps stocks have faltered versus their large-cap counterparts since early-June. Economically sensitive small caps steadily outperformed in the early-stages of the prior two economic recoveries, as well as during the economic acceleration phases in 2013-2014 and 2016-2017.
  • Also, global financial stocks are languishing near multi-year relative lows, encumbered by low interest rates, rising loan loss provisions and concerns about underlying profitability. The sector remains a cyclically-sensitive play, and is the largest weight in the global ex-U.S. benchmark.

Adding it up, the equity market is at short-term risk of consolidating or correcting given the choppy economic recovery, stretched valuations and expectations for a robust rebound in corporate profits.

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