August 03 2022

Are We There Yet?

It could be your lovely progeniture asking the sempiternal question for the millionth times, as you just departed to your holiday destination, and still have multiple hours to go. If it’s the case, read no further, you have better fish to fry and let’s enjoy your holidays.

If not, read on. As equity markets enjoyed a quick reprieve in the last week of July, one can wonder whether we’ve seen the bottom of the market downside that started in Nov21. So, are we there yet?

It’s quite customary to see institutional investors squaring off their books before summer, just to avoid receiving a call while they are in the midst of a sunbathing exercise. Therefore, market tends to sell off absurdly ahead of July. As per BoFA’s survey in July, investors have thrown in the towel. According to Bernstein however, “we haven’t seen yet capitulation in outflows from equity funds”. Who’s right?

First of all, there are many reasons for this downside…inflation in all things food and energy, war in Ukraine, political mayhem at home and geopolitical jengas. However, pent-up demand still runs high, consumption remains elevated, and the Fed seems to be wary of cranking interest rates too much. The market seems to take a good measure of those events, and has repriced the US treasury 10-year down to 2.66%.

What this means is that markets had been a little too drastic, or too early, to price in a full-blown recession. Technically, we are at recession point already with 2 quarters of negative growth in a row, and consumers are bracing for the worst with confidence at the lowest point in 10 years or so. The reality is that activity is slowing down but hasn’t eaten into the cash reserves yet.

What is 4Q22 going to be made of? In my view, it’s highly likely that the gloom will prevail again. The results of consumer goods companies, such as Walmart, already indicate that consumer spending is on the wane. A continuing commodity price inflation will become more prevalent as winter comes around. Capital spending will be the key measure to watch for, and is most likely going to plateau or shrink as a reflection of the blurry economic outlook.

In market terms, this means that this summer is an opportune moment for rebalancing, selling into the higher valuation of developed market stocks and buying back cheaper emerging market assets. The coming 6 months are still going to be volatile.

About –

360 Advisory LLC is a Boston-based RIA managing investments, including crypto