The Ultimate Contrarian Indicator for a Successful Year

The Mood Among The World’s Financial Elite Is Typically a Useful Investment Indicator: However They Feel, Do the Opposite. This Was Especially True As They Gathered In the Mountain Resort Of Davos, Switzerland.

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This year has been more optimistic for bankers, executives and politicians, but only in comparison to how pessimistic they were feeling a few months ago. Just like the markets, they have had a bit of a rally, but are still down compared to this time last year. They are also puzzled by the same uncertainties that trouble investors.
"There's a sense of relief that the recession might not be as bad as initially feared," said Stefano Aversa, vice chair of management consulting firm AlixPartners.

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A contrarian would say that the mildly upbeat mood is a sign that the rally of about 10% in the S&P 500 since September is no more than a bear-market bounce that won’t last. The accompanying drop in the 10-year Treasury yield took it from a peak of 4.2% in October to below 3.4%, giving a huge boost in confidence to those concerned about the rising cost of debt.

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But markets should reflect the fact that the worst fears of the autumn haven’t materialized. Back then, the three big concerns were runaway inflation, energy shortages in Europe and China’s endless Covid isolation. The U.S. inflation rate has dropped fast, the mild winter left Europe flush with natural gas and China has shocked the world with its surprise reopening. In investor cliché, the market climbed the wall of worry.

There are a few potential downsides to China's reopening. One is that a better-functioning China will lead to higher energy consumption, which could in turn lead to higher prices for oil and liquefied natural gas. This could add to inflationary pressures in Europe, which is increasingly reliant on imported energy.
Oil prices have risen slightly since the country lifted its restrictions early last month, but they remain lower than they were even a few days before.

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José Viñals, chairman of emerging-market-focused bank Standard Chartered, said that he believes oil prices will rise in the near future. "It's not going to be major, but it's going to be significant," he said. Viñals added that this increase could have an impact on the global economy.

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The reopening of China will lead to increased demand for tourism and raw materials, which will add to inflationary pressure in other economies. This will be negative for financial markets. There may be some offset from the removal of pressure on global supply chains once the short-term Covid crisis is over, but it is unlikely to be enough to offset the additional demand, especially for energy.

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The second worry is that the market is overly confident that the Federal Reserve will pivot to lower rates later this year, as inflation cools—even though the central bank has not given any indication that rates will stay high until 2024.

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Charles Emond, president and chief executive officer of Caisse de dépôt et placement du Québec, believes that the Federal Reserve is having difficulty convincing the markets of its intentions. "The Fed has no incentive to bring rates back down early," he said.
Thomas Buberl, CEO of French insurance giant Axa, says that companies will have to refinance their debt at higher costs after the rapid rate rises of the past year. This will cause more trouble for companies down the line.

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"You will see the effects of leverage and you will see the effects of reduced liquidity," he said. "That's why I think 2023 will not be an easy year."
I tend to agree with those who are skeptical of the recent rebound in markets, as I am still concerned about inflation. However, I must also acknowledge that some important positive developments have occurred in the past few months. As various concerns are being resolved, prices are naturally rising, and this is precisely what we have seen.

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The mood at Davos is reflective of the current state of markets, which are neither super-bullish nor super-bearish. This is a good thing, as it means that assets are closer to being properly priced than they are at extremes. However, it can also be confusing.