The risk is here. Even if the market seems positive. Don’t get ahead of your skis on this one. Markets can deteriorate quickly.
Beyond the Federal Reserve, 15 other central banks are joining the rate hike mania. It’s number 1 for the stock market right now.
“It’s as if the only answer to inflation is to reduce consumption. The other answer is to increase production. Which means you do more stuff,” says Vladimir Signorelli, head of macro investing boutique Bretton Woods Research in Long Valley, NJ. “More stuff means lower prices.”
The new macro volatility trend is playing out. Business activity is collapsing and US inflation is still above 8%. It’s closer to 9% in Europe, which is worse than the big emerging markets of Brazil, India, South Africa and China. Within the BRICS, only Russian inflation is worse than in Europe and the United States
This means the Fed, European Central Bank and Bank of England are all tackling inflation with rate hikes, despite being aware of the damage to growth.
“Expected policy rates have jumped again since we downgraded developed market equities in July – and recession risks are still not priced in,” says Wei Li, chief global investment strategist for BlackRock Investment Institute. They are underweight the United States and Europe.
Business activity stagnates in the United States and Europe, with FedEx from last week
Li at BlackRock thinks the Fed and ECB will “overreact,” especially to any upside inflation surprises. Expect “excessive policy tightening,” she said, which means recessions in major economies. “Our whole-portfolio approach inspires us to reaffirm our view on de-risking,” Li says.
The Federal Reserve and the ECB are extremely negative
Recent economic data from the United States has been weak, despite a still strong labor market.
Last week’s retail sales data had negative implications for the pace of consumer spending, and the Atlanta Fed cut its GDPNow tracking estimate for the third quarter to just 0.5% annualized, versus 1.3% previously. The only bright spot is that it ends the technical recession caused by consecutive quarters of negative GDP. Now that the US is looking up, some investors may come in and buy at the bottom. But there is now a consensus in the market that bigger lows are ahead. Investors can expect even deeper discounts to global stock prices.
“It’s important to remember that the Fed only cares about economic growth as it affects its two mandates, which are price stability and full employment,” says Solita Marcelli, CIO for the Americas for UBS. Financial Services.
Last week, lower gasoline prices helped limit inflation to a 0.1% month-over-month increase, but headline CPI posted a 0.6% increase . Stubborn inflation has raised fears that this is now taking root.
“We still think the underlying trend is for inflation to slow,” says Marcelli. “But at this point, it doesn’t look like the Fed is on track to hit its 2% inflation target in an acceptable timeframe.”
Meanwhile, across the pond, the European Union is doing what Western governments do best these days. To deal with a crisis, including ones of its own making, enact emergency powers to better control the economy.
The EU’s proposed emergency supply chain powers are a big deal, if they ever materialize. For Wall Street, this signals that Europe will be a tougher market to sell. “If it becomes more than just a proposal, it means more federalism is coming for Europe,” says Signorelli, a move that would eliminate much of the sovereign powers of individual member countries.
“It could mean more predictability for the markets, but that’s all in its infancy,” says Signorelli. “I wouldn’t quite agree to go short, but I wouldn’t buy European equities at this time. German economic power, without cheap energy, is no more. They have to find a way to keep that. If I had a European portfolio to manage, I would prefer to buy UK stocks,” says Signorelli. “Love her or hate her, (new Prime Minister) Liz Truss has the right idea on taxes and energy – cut taxes and increase energy production.”
BlackRock is underweight in the US and Europe, but remains neutral on emerging markets.
China’s economy is back in stimulus mode, although that won’t be your China stimulus package. The Chinese stock market is in bearish territory, so investors may react to this spending and start buying the big Chinese ETFs like FXI MCHI and ASHR.
Consumer demand is still weak in China. Property prices have fallen and coronavirus lockdowns have continued, most recently in the city of Chengdu.
Data released last week showed industrial output rose 4.2% year-on-year as drought conditions and power shortages eased. Capital investment in the first eight months of the year rose 5.8% compared to the same period last year, suggesting that the infrastructure stimulus was timely.
The renminbi is trading near 7 to the dollar, its weakest level since May 2020.
Uncertainty will remain high due to inflation. Even President Bidens’ recent statement about the end of the Covid pandemic phase, which the market would have applauded earlier this summer, did little to entice bulls into the market.
“We see limited upside until June next year,” says UBS’s Marcelli. “Selectively add to exposure. We favor defensive stocks, quality income stocks and value stocks.