Aniket Ullal, vice president of ETF data and analytics at CFRA Research, has published a note on the recent market rally in the US, writing that ETFs representing the major asset classes bounced back in Q4 (through November 11, 2022), after a particularly challenging first three quarters, driven by inflation being lower than expected.
The Q4 rebound included ‘risk-on’ asset classes, such as US small caps, emerging market equities, and high yield corporate bonds, he writes.
The top 10 thematic ETFs with the highest ‘bounce’ from the November 10 inflation announcement included four ARK ETFs and themes like online retail, cloud computing, and the gig economy.
Ullal comments that this near-term turnaround contrasts sharply with the trend of the past three months, as investors have been rotating into defensive categories like treasuries, defined outcome, low volatility, and dividends.
“It is not clear if this rally represents a true market bottom,” Ullal says. “The Federal Reserve’s December meeting and upcoming retail sales and earnings will be important events in the next few weeks.
“As of the close on November 11, 2022, the market was at an interesting point. The sharp two-day bounce back in growth-oriented themes contrasted sharply with the defensive posture adopted by US ETF investors indicated by flow trends over the trailing quarter. The longer-term outlook for 2023 remains uncertain, and it is not clear that this rally signals a true market bottom.”
Ullal writes that a key factor will be whether the US Federal Reserve decides on a 0.50 per cent (rather than 0.75 per cent) increase in its December meeting as well as its outlook for 2023 increases. “Retail sales and earnings will likely be a factor in the Fed’s decision as it attempts to balance lowering inflation without pushing the economy into a recession next year” he says.