CSGKF - 10 Factors Influencing Today's Markets And How To Exploit Them

Summary

• For years, I have tracked a list of the top 10 factors I believe to be most influencing security market prices.
• It has been a reliable and confidence-building guide for me for years, helping me make sense of the markets and the world as I invest.
• I present this continuously-updated list to the Seeking Alpha audience for the first time here.

By Rob Isbitts

After a historic 2022, in which investors experienced significant declines in both stock and bond markets for the first time in their investment lives, it is fair to say that we entered 2023 with a bull market in uncertainty. Now that we are about 11% through the year (yes, already!), let's reset and prioritize 2 things:

1. What major factors are moving the markets, influencing their price action

2. How investors can try to use these factors to their advantage, even if the impact these issues have on market levels is not the friendly kind. That is, whether stock or bond prices go up or down as these factors play out, there is a way to preserve and grow capital. Because there always is, in any environment.

The Market Outlook Factor Overview (MOFO)

Each week, I update something I affectionately call the MOFO. It stands for Market Outlook Factor Overview. It is a list of issues, ranked in descending order of current significance, that I believe are and will soon influence how market prices move. Because with all of the intelligent debate that takes place daily on Seeking Alpha and elsewhere, the only thing that ultimately matters to any investor is this: what's my account balance?

And, while at first glance, the name might imply that this is a list of negative items, that is not the case. In fact, any event, trend or any factor that increases risk or reward potential for investors is not "bad news." It is simply something we have to deal with as investors, playing the long game like the Eagles and Chiefs will this Sunday, but recognizing that some fumbles, interceptions, and negative plays come with the territory. Investing is not only not perfect...sometimes, success is downright ugly. So, with that perspective covered, let's see what this MOFO list (which I updated this week, and do early in each month) has to tell us.

Above is the monthly MOFO, updated for the month of February. I'll now dive into each of the 10 items, and summarize both the reason they made the list, and how investors can potentially exploit them, rather than just sitting there and let the markets have their way.

1. Inflation

Inflation tops my list of market factors that matter right now. As the above chart shows, inflation on a year-over-year basis has come down sharply from its recent peak level of over 9%, a level not seen since the 1980s. A year ago, the only people likely to be talking about inflation were Wall Street types. Today, everyone around the globe knows what it is, and knows it is bad.

Inflation impacts everyone, but it may be particularly tough on those who do not own financial assets. That's because investors can use tools to hedge the impact of rising or falling inflation in their portfolios. If an investor thinks inflation will re-ignite higher from here, there are ETFs that focus on stocks that historically have been inflation beneficiaries. Horizon Kinetics Inflation Bnfcrs ETF ( INFL ) is one I follow. On the other hand, to exploit falling inflation, that likely correlates with falling bond prices, an event that would reverse the sharpest spike interest rates most investors have ever seen. Across the bond market yield curve, there are ETFs that can help turn bond investing into a total return venture, by adding potential capital appreciation as bond prices fall to the income yield you are already getting from owning it. I have highlighted several of these in my past articles, but for simplicity, US Treasury ETFs such as iShares 20+ Year Treasury Bond ETF ( TLT ) and iShares 7-10 Year Treasury Bond ETF ( IEF ) are 2 examples.

One other things to realize about inflation, if it does stabilize or even drop into, say the 4-5% range. That level is still way above what today's global consumer is used to. So lower inflation is better than 9% as we recently saw. But it doesn't mean there won't be some significant market turmoil and impact on securities prices. I think we have entered a new era of higher than normal inflation, as opposed to the "it's going to drop from 9% to 2% quickly" position taken by some pundits.

2. Corporate Earnings

Bloomberg.com reported that fewer S&P 500 companies are exceeding earnings estimates, based on data from the current quarter. Earnings are a true Wall Street sport, whereby analysts keep lowering them until companies can beat those lowered estimates. That keeps all of those investment banking relationships intact, so the companies and the brokerages issuing the estimates are both happy. But this could be a canary in a coal mine, so to speak. Companies are cutting labor, but as 2022's rate cuts truly start to impact economic activity, that could crimp consumer demand. And consumer spending, the life blood of a decade of global economic growth, could finally run out of steam. Translation: earnings might dip, but they could also crash this year.

How does an investor exploit an "earnings recession," which is what I described above? If, as is typically the case, that situation leads to falling stock prices, there's a healthy list of "single inverse ETFs" that essentially deliver the opposite of what a stock index does. For instance, SPDN, which I wrote about on Seeking Alpha last October , moves opposite the S&P 500 Index.

3. Fed Policy

This was number 1 on the list for months, but I dropped it to number 3 this month. Why? Because, as you might say, the market appears to finally be "Fed up" with the constant obsession over every word, phrase and eye twitch from Fed Chairman Jerome Powell and his cohorts. Maybe this fixation on the Fed will go on indefinitely, but I suspect the big rate "surprise" was last year's series of hikes. The market is more used to the idea that Fed policy will now operate in a less-volatile manner, as the rate hikes are nearing an end (for now), and the rest of 2023 might instead be about how the economy reacts to them. Remember, there is a notorious lagged effect on those things. And we have not yet hit the point where the greatest impact on the economy will be felt.

4. Short-Term Bond Rates

I have written ad nauseum about this in the past few months, so check out my profile reports on several ETFs that own US T-Bills or other bonds maturing in the next year or 2 (or 3, in some cases). This report on iShares Short Treasury Bond ETF SHV was one that seemed to bring out investors interested in short-term bond investing. After all, it has been a long time since one could even write about a T-Bill ETF with a straight face, given how low short-term, high-quality bond rates have been for many years. That story has shifted dramatically, and it made the number 4 spot on this month's list because of how it is causing retirees and other investors to re-think how much equity and long-term bond exposure they want to have this year.

5. Economic Growth

Recession or no recession? I say, who cares what you call it. Global economic growth is likely to stay range-bound for a while, and that range could lie on either side of zero, but close to it. That's enough for me to conclude that a weak economy is going to have an impact on stock and bond prices as 2023 continues. One possible scenario is that the fear of this drops the stock market, and that sets up an opportunity to buy stocks at value prices later this year or into 2024. I'm not holding my breath on that, but as I see it, the faster we get the plunge to new lows, the test of those lows and the start of a new bull market in stocks, the better.

6. Market Sentiment

And that leads us right into number 6 on this month's MOFO. Check out the chart below. As they say, this is not a good look.

The US Index of Consumer Sentiment is not just down, it appears to be pinned to the mat like a wrestler about to lose a match. The index has not recovered at all from its 2020 lows. And, while this is far from the only sentiment indicator that matters, and that I cover in my macro work, it has been a very good guide to understanding just how risky the current investing environment is. So, unless this reverses rapidly, we increasingly must compare it to the other historical periods in which it sat under well below the 100 level for a while. Those coincide with some of the worst stock market years in history. However, it can also work the other way and serve as an early indicator that the stock market is trying to carve out a long-term bottom, as was the case in 1980. But we have to ask ourselves, how relevant is what happened in 1980, versus more modern time frames. After all, the markets have changed dramatically, especially in regard to the nature of its participants.

7. Hidden Leverage

I wasn't going to show a chart here, or even name any names. But in writing this article, I changed my mind. Because while FTX fiasco was newsworthy and salacious, the situation at one of the world's most connected and central financial institutions, Credit Suisse Group AG ( CS ). The stock price is showing you in real time that a major global bank is losing money, losing client assets, and potentially infecting other parts of the financial system. This, in turn, can start to unveil which big-money investors were too leveraged for their own good. In my experience, bubbles like the ones we have now typically burst for the same reason: someone was too levered up. Or, many someones were.

Until the markets consider this a problem, it is not a problem for investors' portfolios. However, if it does get out of hand and prompt a credit crisis, one interesting ETF to take a glance at is ProShares Short High Yield ( SJB ). This is another one of those single inverse ETFs, but it essentially shorts high yield bonds. To me, this ETF has always represented a potential way to cash in on disruption in the credit markets. After all, when investors panic over liquidity and credit risk, they typically pile into US Treasuries...and out of high yield bonds. The latest example was in early 2020, when SJB rallied 25% in about a month, while the S&P 500 fell by about 30% over the same vicious time frame.

8. Equity Valuations

The Shiller CAPE P/E Ratio sits near the 30x level. More significantly to an investor like me that likes to analyze charts much of the day, the current CAPE Ratio pattern is starting to look too much like the Dot-Com Bubble and Global Financial Crisis eras to me.

9. China Re-Opening

Do we really know what's going on inside China and in its economy? To me, the grand re-opening after, shall we say, an extended Covid lockdown period, is going to be something to watch. But it is very low on my list, at number 9 this month, because I see too much opacity here, and not enough clarity. That did not stop ETFs we've covered at Seeking Alpha, like KraneShares CSI China Internet ETF (KWEB) from spiking in price on just a whiff of optimistic news from that part of the globe. Will this be a case of buy the re-opening, sell the re-opening shortly afterward? We'll see.

10. Russia/Ukraine

For those expecting me to recommend or even comment on any Russian ETF or stock, I'm sorry to disappoint you. I'm not going to. I'll instead simply say that this former number 1 "hit" on the MOFO list has faded, as the war has drifted to the back pages, so to speak. But with heavy machinery headed in to support Ukraine from other countries, this could again become a market-mover. So I am keeping it on the tail end of the list, in case that does occur.

That's a roundup of the top 10 factors I am watching now. I welcome any suggestions as to other factors I should consider. I update this list monthly, and whenever there is a major market disruption that prompts a re-ranking or replacement/introduction of individual factors. This MOFO has been a reliable and confidence-building guide for me for years, helping me make sense of the markets and the world. I hope its debut on Seeking Alpha helped you too.

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