The Israeli securities market is influenced quite a bit by the American securities market, both due to the dual stocks and due to the influence in the sense of sentiments that come from Wall Street to Tel Aviv. Therefore, even for investors in the local market and certainly for those in the American market, it is important to understand and analyze what is expected in the annual reports of the American firms. The banks were the first to report and most of the reports were good, although here and there the results were significantly lower than the results. The rate of reports will increase next week.
Analysts usually adjust their forecasts towards the end of the quarter, the results of which will be published a quarter later. Over the past 20 years there have been downward earnings adjustments at an average rate of 3.8% and a slightly smaller adjustment in the last five years. Usually the updates are accurate and the rate of deviation from the latest updated forecast is less than one percent (on average).
The last quarter of 2022, the results of which will be reported soon, is unusual: on average, analysts lowered the profit forecasts of the companies listed for trading in the US by an extremely high rate of 6.8%. In other words, the updated forecast predicts an additional abnormal decrease in the rate of decline in the profitability of the American companies. Three reasons for the abnormal fit of the forecasts:
1. The last quarter of 2021 presented particularly good results compared to the last quarter in 2020 when the latter was severely affected by the corona pandemic. If the rate of improvement in profitability in 2021 compared to 2022 actually expressed a correction in relation to a bad year, then the last quarter in 2022 will have difficulty repeating the results of 2021.
2. Clear signs of a slowdown are accompanied by a significant increase in the prices of raw materials, and a significant increase in the cost of money (interest).
3. Extreme weather hazards towards the end of 2022 silenced certain sectors and their activity became unprofitable.
However, the aforementioned factors were known even before the last quarter of 2022, and despite this, analysts continued to update their forecasts downward by an additional rate of 6.8%. Is lowering the expectation by 6.8% an overreaction? If indeed it is an overreaction, and it is assumed that it is an overreaction Due to its being particularly unusual, the profitability of the companies that will be published soon for the last quarter (and annual summary) will be higher than expected and it is likely that the stock market will react positively. Even if the profitability rates are in line with the expectation, the market may react positively. If so, then towards the middle of February and maybe even before It has experienced a considerable rise in the stock market.
There is of course room for caution because there is also another possibility even if in practice it turns out that the forecasts were too low. Analyzes recently published in the business press indicate that the rate of optimistic predictions about the capital market later in 2023. According to a survey published in the US, in the last week most of the analysts are optimistic about the capital market, at least in the second part of 2023. What does this figure mean?
Let’s take for example one of the critical variables today: will the governor of the central bank continue to raise the interest rate or maybe not? And maybe even download it at the end of next year? If the portfolio managers are relatively optimistic, then they believe that interest rate hikes are over. That is, from the point of view of plausibility, they expect a one-world situation and the price level in the capital market embodies this optimism, while there is a probability that the actual world situation will be the opposite.
So maybe there is some kind of indication anyway?
There is an unusual index that is based on market sentiments and less on technical indicators and it is called the opposite opinion index. The index works in reverse to the law of the herd, which describes a phenomenon that during periods of falling prices the public flees from securities and, on the other hand, joins a rush to the market when the prices of the securities are at their peak. It could be argued that this kind of behavior characterizes the uninformed public while sophisticated analysts know how to ride on the timing. But this is not the case. This means that the market changes direction only when the level of pessimism in the market is at its peak.
We will add to this an important variable: the rate of free cash under the control of the investment managers and portfolio managers. There are two main factors for the level of cash: 1. Optimism on the part of financial managers will lead to higher exposure to securities. 2. In the “bullish” market, the rate of cash deposits in the hands of fund managers increases, especially at its peak. In the “bear” market, the appeals of the public are increasing.
Naturally, the portfolio managers will broadcast optimism both when their exposure rate is high, or when the public withdraws a large amount of funds, and this in order to try to reduce the withdrawal rate. If the cash rate is low, the cash reserves that may enter the securities market and fuel further increases are low. In addition, due to the law of the herd mentioned above, during periods of a bear market the public tends to withdraw funds from mutual funds or managed funds, which further reduces the portfolio manager’s cash reserves.
Thus, optimism accompanied by a low cash reserve rate is a sign of excess risk and a negative trend. The opposite is also true: excessive pessimism and high cash reserves can be a distinctly positive sign in the capital market. In other words, instead of trying to predict whether the governor of the central bank will raise or lower the interest rate, it is perhaps better to act against the market sentiments since the market sentiments are reflected in the cash reserves that may enter the capital market.
Today the level of cash reserves is relatively low (the level of withdrawals from mutual funds and managed funds in the US is at a negative record of 15 years in all types of securities (what is more, the American central bank has stopped buying bonds) and at the same time the level of optimism is over 50%. If the high level of optimism reflects an attempt to moderate the peak rates of withdrawal of funds by the public, then there is a signal that the turning point in the securities market is near. However, if the level of optimism is true, the peak of the crisis is still ahead of us. The past proves that in most cases of a “bear market” there must be a period of panic before the market changes direction.
There is no feeling of panic yet and maybe there won’t be.