As 2023 draws to a close, a report from Albert Edwards, a global strategist at Societe Generale known as the "Forex Bank Bear," is sounding the alarm on potential upheavals that could shock the global financial markets in 2024. In his final "Global Strategy Weekly" of the year, Edwards focuses on the instability of the US tech industry and its potential impact on the broader market, as well as analyzing the likelihood of a US economic recession.
Edwards warns that the bursting of the bubble in the US IT sector could be the biggest market "black swan" event of 2024, potentially dragging the entire US market into recession. He notes that the widely anticipated US economic downturn did not materialize this year, which was one of the macroeconomic "surprises." Another surprise was the surge in the US IT tech industry driven by the explosion of AI, with the advent of ChatGPT sparking a FOMO (Fear of Missing Out) frenzy among investors, even as bond yields soared above 5%.
Edwards acknowledges that the remarkable performance of the US "tech" sector this year was largely driven by the "Big Seven" tech giants - Apple, Microsoft, Google, Amazon, Meta, and the newly joined Nvidia and Tesla. He remarks that this has resulted in US tech stocks now comprising nearly a third of the US market value, double what it was five years ago.
Looking ahead to 2024, Edwards predicts that the US tech industry will dominate the US stock market, much like the brief period of frenzy in the summer of 2000. He points out that until the "Powell Pivot" at the end of 2018, the price-to-earnings ratio of US tech stocks was only "slightly higher than the market" and both were in the teens. Now, compared to the overall market's forward price-to-earnings ratio of less than 20 times, the US IT industry stands at 27 times, a significant premium.
Edwards also notes that technical indicators suggest the US stock market currently appears somewhat overheated. Various metrics support this view, such as CNN's Fear & Greed Index showing extreme greed, and price momentum, bullish/bearish ratios, and volatility all indicating stretched conditions. He highlights that the market significantly pulled back by nearly 11% in the three months following July when the CNN index was at similarly high levels. Additionally, the current extreme greed reading of 79 contrasts sharply with last year's fear signal of 38.
Moreover, the rapid approach of retail investors' bullish-bearish balance towards record highs signals a potential market adjustment.
As for the US economy slipping into recession, Edwards suggests that the recent robust performance of the S&P index doesn't seem to indicate an imminent risk of economic downturn. He quotes Gerry Minack from "The Australian" who observed that "two months before the start of an economic recession, the S&P 500 index typically falls by 2% from its cyclical high."
