Is the market downturn finally over?

Ela Karahasanoğlu

– It was a lot of bloodshed in crypto land. As of November 18^th Bitcoin plummeted -19% since the beginning of the month which paled in comparison to Ethereum that lost -23% over the same period. Bitcoin and Ethereum are now down -64% and -67% respectively year to date. Just to put the erosion of wealth into perspective, Bitcoin and Ethereum investors would need to gain +180% (that is 2.8 fold) and 205% (that is roughly 3 fold) from here on to reach the close at the end of 2021. Such events underline one of the basic rules of investing – avoiding large losses is more important than locking in large gains.

– Interestingly though, the crypto crash didn’t spill over to equity markets despite the relatively strong correlation between the two. To the contrary, equities had a decent come back in November on the back of US inflation data that came out mid-month. It showed that the consumer prices were cooling off with core inflation going from 6.6% back to 6.3%. The headline inflation that includes energy and food prices also showed a drop from 8.2% to 7.7%. 

– Indeed as of November 18th the global equity index MSCI All Country World Index (ACWI) was up roughly 5% month to date bringing the year to date loss down to -18% hence dragging ACWI out of the bear market territory. The emerging market index MSCI EEM (EEM) was up by a whopping 11% month to date. Despite this great performance, EEM remained firmly in the bear market territory with a loss of -22% year to date.

– The real winner in equities was the Turkish stocks, bringing the return on Istanbul 100 stock exchange to 144% in Turkish Lira (a whopping 74% in US dollar basis) year-to-date, making it by far the highest returning stock market globally in both local and US dollar terms. With the US dollar equal to 18.62 Turkish Lira on November 18th, the greenback gained 40% against the Turkish Lira since the end of 2021.

– Are we done yet with the market downturn? Most likely not. The most recent figures indicate that the inflation pressure has not lessened and the risk of global recession has not disappeared yet. While currently everything looks on the up on up in financial markets, it still warrants caution going into the last leg of the year. During these periods markets are more vulnerable and sensitive to buying and selling pressures. 

There was no shortage of interesting news since late October onwards with Elon Musk finally acquiring Twitter before firing half the company which prompted the other half to either resign or to start looking unless they confirmed via email that they would work “very hard” going forward… The recession fears triggered decisions to do mass layoffs in major tech companies including Amazon and Facebook’s parent company Meta and many others… Then there was the US elections on November 2^nd with Republicans who managed to gain the majority in the House of Representatives, although just barely.. and to make matters more interesting on November 15^h Donald Trump declared his Presidential bid for 2024 elections…

LARGE CRYPTO EXCHANGE FTX BLEW UP SPECTACULARLY

Yet nothing really matched the spectacular blow up of the multi-billion crypto exchange FTX and its sister firm Alameda Research founded by the 30-year-old entrepreneur Sam Bankman-Fried taking down not just its clients but a number of well-known asset management firms and investors alongside it. This sent ripple effects throughout the crypto markets. While every day new details of the FTX fiasco surfaces in the media, it is still not clear where billions of dollars of customer assets have disappeared to. It is a treasure hunt out there!

In the aftermath of the failure, the newly appointed CEO John J. Ray  III who took over the bankrupt FTX to see it through its liquidation said “Never in my career have I seen such a complete failure of corporate controls and such a complete absence of trustworthy financial information!”. This says a lot coming from the man who also oversaw the liquidation of Enron back in early 2000s, one of the largest blow ups in US history.

FTX debacle triggered a mass exodus from crypto markets crippling the already weak Bitcoin and Ethereum as gates were raised and everyone rushed for the exits at various exchanges. In the interim the crypto exchanges that managed to survive the debacle raced to prove who had better reserves while noting that the FTX failure would only strengthen and legitimize the crypto landscape. Yet, so far the only purpose it seems to have served is to strengthen the lawmakers’ resolve to regulate the crypto markets sooner than later.

LOT OF BLOODSHED IN CRYPTO
It was a lot of bloodshed in crypto land. As of November 18^th Bitcoin plummeted -19% since the beginning of the month which paled in comparison to Ethereum that lost -23% over the same period. Bitcoin and Ethereum are now down -64% and -67% respectively year to date. Just to put the erosion of wealth into perspective, Bitcoin and Ethereum investors would need to gain +180% (that is 2.8 fold) and 205% (that is roughly 3 fold) from here on to reach the close at the end of 2021 which isn’t even the peak for either crypto currency. Such events underline one of the basic rules of investing – avoiding large losses is more important than locking in large gains.

THE MAIN REASON DRIVING THE MARKETS

Interestingly though, the crypto crash didn’t spill over to equity markets despite the relatively strong correlation between the two. To the contrary, equities had a decent come back in November on the back of US inflation data that came out mid-month. It showed that the consumer prices were cooling off with core inflation going from 6.6% back to 6.3%. The headline inflation that includes energy and food prices also showed a drop from 8.2% to 7.7%. In the world of “not too bad news is good news”, the data instilled hope that going forward FED may not be as hawkish. Yet the Federal Reserve officials didn’t lose too much time before raining on the market optimists’ parade and hammering down any hope that the rate hikes were going to potentially slow down. This had some calming effect on the markets, but equities globally managed to remain positive since the beginning of the month erasing some of their losses from earlier in the year.

Indeed as of November 18^th the global equity index MSCI All Country World Index (ACWI) was up roughly 5% month to date bringing the year to date loss down to -18% hence dragging ACWI out of the bear market territory. The emerging market index MSCI EEM (EEM) was up by a whopping 11% month to date. Despite this great performance, EEM remained firmly in the bear market territory with a loss of -22% year to date.

REAL WINNER WAS TURKISH STOCKS

The real winner in equities was the Turkish stocks, bringing the return on Istanbul 100 stock exchange to 144% in Turkish Lira (a whopping 74% in US dollar basis) year-to-date, making it by far the highest returning stock market globally in both local and US dollar terms. The reason for a lower return in US dollar basis was due to declining Turkish Lira against the US dollar. With the US dollar equal to 18.62 Turkish Lira on November 18^th, the greenback gained 40% against the Turkish Lira since the end of 2021.

It was a mixed bag in commodities in November as of the 18^th although both  commodities remain in the red year to date. The first month futures contract for US crude oil WTI was down -5% bringing its loss to -6.4% year to date. On the other hand, the first month futures contract for gold was up by +8.5% which buffered most of it losses and bringing it to -2.6% on the year.

MARKET VOLATILITY COULD JACK UP QUITE A BIT

Are we done yet with the market downturn?

Most likely not. The most recent figures indicate that the inflation pressure has not lessened and the risk of global recession has not disappeared yet.

While currently everything looks on the up on up in financial markets, it still warrants caution going into the last leg of the year.  As the holiday season nears investors generally unwind their positions. This tends to jack up volatility in the markets partially due to the reduced liquidity which creates thinner markets with fewer players. This makes markets more vulnerable and sensitive to buying and selling pressures.

There could be a “perfect storm” towards the end of the year given market volatility has already been inching up since the beginning of the year. As the graph below illustrates, the number of months with outsized moves up or down in the US equity market SP500  has now reached other crisis levels. This warrants caution for investors as such moves could wreak havoc in markets with low liquidity This has happened more than couple times in December as investors may remember.

As we have reiterated before, it may not be easy to predict the markets but it is possible to create a diversified portfolio that is resilient to various market conditions. After all, there is no bad trade. There is only bad sizing!

ELA KARAHASANOGLU, MBA, CFA, CAIA

International Finance Expert

karahasanoglu@turcomoney.com

ela.karahasanoglu@ekrtotalportfolioadvisory.com

https://www.linkedin.com/in/elakarahasanoglu/

Who is Ela Karahasanoglu?

Ela Karahasanoglu is the CEO of EKR Total Portfolio Advisory based in Toronto, Canada. EKR advises global institutional investors and asset managers on alternative investment and portfolio construction from a total portfolio perspective. Previously, Ela was the Head of Total Fund Management team at BCI, one of the largest asset managers in US and Canada with assets over $200 billion.

Ela has over 25 years of international investments and executive leadership experience. She has worked with global asset management, consulting and pension fund companies in London, New York and Toronto including UBS, Merrill Lynch, Mercer, CIBC Asset Management and BCI. Ela is a frequent speaker and a globally published investment thought leader in institutional asset management. Amongst the awards she has received includes the “Global Leading Innovator” in 2020 and “Hedge Fund Rising Star” in 2018 by The Institutional Investor, one of the leading publications in the institutional investment field.

Ela is a graduate of Uskudar American Academy in Turkey and has earned her MBA from Georgetown University in 2000. She has been a CFA Charterholder since 2002 and a CAIA Charterholder since 2010. Ela serves as the Co-Head for CAIA’s Toronto Chapter since 2018. She is married and lives in Toronto.