Market temperature indicators suggest fixed income investors should look to Asia for opportunities

AS the physical world continues its war against the coronavirus pandemic, the financial world seems to have passed its judgement with regard to the future, at least if we are talking about the US. Even with deaths on the rise, the economy in a deep freeze, and job loss numbers at unprecedented levels, the S&P 500 rallied 28 per cent between its trough on March 23 and May 15. The technology-heavy Nasdaq index did even better, hovering at slightly above its end-2019 level last Friday.

One factor frequently cited by market participants who argue for the sustainability of the rally is that big technology stocks like Amazon and Netflix have propelled the swift market rebound, and tech firms should be resilient against the global pandemic. While there is some truth to this observation, my review of data suggests it is not exactly the case.

For instance, the performance of the equal-weighted version of the S&P 500 (+27 per cent from March 23 to May 15) and the small-cap stock index Russell 2000 (+25 per cent) wasn't far behind the (cap-weighted) S&P 500. And the two indices actually outperformed the latter prior to last week's losses, when simmering US-China tensions and warnings by Fed chairman Jerome Powell and other Wall Street heavyweights about downside risks put a damper on market momentum.