Quick Recap
- Markets had their first down week after four weeks of gains. Energy and Healthcare eked out small gains and every other sector was negative with Consumer Discretionary leading the losses.
- The S&P 500 closed at 4,228.48. Markets had a choppy week in a pretty narrow range and had a pullback Friday that put the index negative for the week. The VIX is back above $20.
- The market has retraced a lot of gains since the decline in 1H. Bearishness is still very high amongst institutional investors.
- Retail investor sentiment has remained high.
Details
The market had its first down week after a strong rally. Macro concerns amongst investors are high and there is no shortage of bears on the markets. At the same time, inflation rolling over has proven a strong positive catalyst. When inflation is high bonds and stocks are positively correlated, which gives institutions nowhere to run and nowhere to hide. When the environment is disinflationary or deflationary the correlation is generally negative. And then remember also that there are almost no living portfolio managers that have been alive in an inflationary environment like we face today. My base case remains that if inflation has peaked this should potentially set us up for a rally in equities during the 2H where new all-time highs are possible.
Some investors may still have the scars from the 2008 Global Financial Crisis that may be coloring people’s fears. History has often shown, markets do tend to “climb a wall of worry” and inflation has been the main thing investors have been afraid of. However, the de-anchoring of inflationary expectations that led to the “shock and awe” approach that then Federal Reserve (Fed) Chairman, Paul Volcker famously took with markets in the beginning of the Reagan Administration is not currently occurring. If the market’s expectations are largely in line with eventual Fed actions, then the type of rapid re-pricing adjustments that can cause unpleasant forced selling of assets should be less likely. The character of the decline in 1H 2022 was not one of panicked desperation but rather orderly trading despite the extreme Price/Earnings multiple compression that occurred in stocks. The pervasive bearishness That likely remains on the Street means that the amount of cash/dry powder on the sidelines is also very high. So, from a risk/reward perspective, I remain convinced that any positive catalysts or resolution of key macro issues could lead to a pretty fierce equity rally.
Scotsman’s Outlook
- The meme stock madness that was so prevalent in January 2021 appeared to make somewhat of a comeback this week and at earlier stages of this current rally. Our monitoring of the Reddit message boards suggests that activity is nearing all-time highs and is on track to eclipse them. Generally, the positive retail sentiment on the site has been a contra-indicator. We want to remind you that elevated mentions of stocks on the Wall Street Bets forum has historically tended to be bearish.
- The Russians have announced they will soon shut off the gas to Nord Stream again “for repairs”. Fear is building about what the great wounded Bear of Europe will do as winter approaches. German growth, essential to the viability of the entire Euro currency area, is largely dependent on cheap Russian gas. Putin will likely be able to cause a recession in Europe and severely strain European unity in a way not seen since 2012 when the Euro debt crisis was a key catalyst for financial markets. Also, upward pressure on Energy prices might cause inflation numbers to move back upward if they are extreme enough. In the event there is not enough natural gas, many plants may switch to oil. This obviously causes upward price pressure on both crucial energy commodities. The grinding conflict between Russia and Ukraine has taken on a grim character and there does not appear to be a quick resolution in sight. Ukrainians are trying to take the offensive, but they really do not have the military resources or training in large, combined arms offensive operations. So, for the moment, the conflict is a resource-draining stalemate. The Newday team is always praying for those suffering from this devastating and tragic conflict.
- The Newday equity team are all leveraging our resources and working long hours to try to provide you with the best research available. We look at the market through different lenses and try to zero in on what the highest probability outcomes are. Enjoy the summer before it slips away!
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