Rudi’s View: Corporate Earnings, The Best Indicator?

Rudi's View | 10:00 AM

By Rudi Filapek-Vandyck, Editor

Today's markets are confusing many, not in the least because many traditional indicators don't seem to apply anymore.

Us, humans, we like to at least have some sense of control or predictability about things, and when that "security" drops away, we feel uncomfortable.

This, to a large extent, explains why today's bull market has not been widely embraced as a positive phenomenon. There are way too many contradictions involved.

When the Federal Reserve (and other central banks) embarked on a steep tightening path in early 2022 it didn't take long for bond markets to invert; whereby short-term yields exceed those further out on the yield curve, which is a classic signal that economic recession is on the horizon.

The US yield curve started inverting in mid-2022. Two years later, the expert community is still debating whether there will be negative economic growth or not. Locally, the official statistics have remained in positive territory because of seldom-witnessed immigration influx.

The RBA might yet deliver one more rate hike, but other central banks outside of outlier Japan are all preparing for policy loosening, i.e. rate cuts. The global policy reversal has already started, now also including the RBNZ.

Bond markets in Europe and the USA have already started to price-in rate cuts before year-end. Clearly, this is a positive for equity markets... as long as that anticipated economic recession does not follow next.

Can investors simply rely on financial markets getting it right? Of course not! Markets reason in the here and now and if/when signals change down the track, they simply re-adjust accordingly without blinking first.

2024: The Big Dichotomy

A lot is being written about the dichotomy in share markets where a small selection of strong performers keeps pushing indices to fresh all-time record highs, leaving behind a large majority that simply cannot catch a bid, outside of the occasional attempts for momentum reversal.

There's an even greater contradiction happening between numerous traditional indicators pointing at economic recession and economies simply refusing to play to that script.

With the bulls firmly in charge of share markets, the bears have their indicators to rely on, but little else. Sour grapes, heartache and migraines, maybe?

Calls and predictions of a severe share market correction, let alone a crash, have been well off the mark and completely out-of-sync with markets that rally further into blue sky territory.

In defence of the many Cassandras, today's dichotomy surrounding some of the most used indicators is quite remarkable, and possibly unprecedented. It might even elicit the occasional observation that this time, indeed, things do look different.