Laughing Stock

Image source: Midjourney AI

What's going on?

Analysts made a bold prediction this week, warning that the US stock market could be in for a tumble.

What does this mean?

US stocks have begun 2023 in style, cruising along in the green and clocking up one of the best starts on record – a welcome turnaround after they had their weakest performance since 2008 last year. But strategists at Morgan Stanley (MS) think investors are living in la-la land: the firm’s number-crunchers – who nailed last year’s predictions – are now betting that this sunny spell is about to get very stormy indeed. And they could be right: see, while markets are banking on the Federal Reserve taking it easy on interest rate hikes, MS sees things playing out differently – especially if inflation data comes in hot and heavy this week. Factor in the anemic economy and the fact that earnings estimates could keep tumbling, and MS is betting that US stocks will dive to a low this spring.

Why should I care?

For markets: Fear factor.
Sure, this is just one take, but there are already signs the tide is starting to turn. For one, US stocks had their toughest period of the year last week. And for another, the “put-to-call skew” – an indicator of whether investors are guarding against a drop or aiming to make money from a jump – is at its highest since August, when a two-month rally sharply reversed. That suggests folk are getting antsy, so if these signposts are anything to go by, consider going easy on risky bets for now…

Zooming out: O Canada!
You might want to consider taking your money north of the border for a while. The price-to-earnings ratio – a key valuation metric – of Canada’s S&P/TSX Composite Index is much lower than the S&P 500’s. Plus, the market’s full of commodity stocks ready to take off with China’s reawakening, from oil and gas to farm supplies and fertilizer.

Originally posted as part of the Finimize daily email.

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