Market Updates

THERE HAS BEEN A SIGNIFICANT SHIFT IN THE REGIME

Published On: June 3rd, 2022|By |Categories: Market Updates|4.1 min read|

This is the summary of our weekly update, you can read the full blog here

Last week broke the multiweek losing streak for global equities as most major indices produced a strong bounce. Only time will tell whether the short-term rebound is the beginning of a sustained recovery in stock prices, or a temporary blip caused by selling exhaustion. Recalling the bursting of the dotcom bubble, the NASDAQ Composite dropped a stunning 80% from its high in March 2000 to its nadir in October 2002. In that time, there were eight significant rallies in the Index that averaged just over 26% (chart and table below) and lasted from 2 weeks to 3 months. Calling the ultimate bottom of a market correcting many years of speculative excess is no easier today than it was 20 years ago.

Source: Bloomberg Finance

NASDAQ Counter Trend Rallies From March of 2000 to Octorber of 2002

Source: Strategas Research Partners

We have produced the below chart in prior writings to highlight how behind the curve the Fed is in addressing the current spike in inflation. The Fed needs a lot of help in the form of smoothly functioning supply chains and declining commodity prices in order for inflation to fall.

Interest Rates Vs. Inflation

Source: Strategas Research Partners

Income growth for the FAAMG (Facebook, Apple, Amazon, Microsoft, Google) stocks this year is expected to decline -5% (chart below). This is a material change to years past where these stocks were growth leaders. Although the consensus believes growth will return next year for these companies, the bigger risk may be if growth expectations disappoint once again. It must be remembered that these names still constitute over 20% of the overall index. Investors expecting a return to the old playbook of buying growth at any price are failing to recognize the significant regime shift that has taken place over the last year.

FAAMG vs. S&P 500 vs. Ex. FAAMG Net Income Growth

Source: Strategas Research Partners

In brief the weight of evidence as yet does not confirm all clear for risk assets and and suggests that a more defensive portfolio strategy is still warranted.

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ABOUT THE AUTHOR

David Williams (1970) is responsible for the investment policy of Mpartners. After a brief career in diplomacy with the Ministry of Foreign affairs in Barbados, David joined Insinger de Beaufort asset management in 1997 and became a director in 2002. He was responsible for the investment team and the investment funds (long-only and hedged). His specialism is European equities. David holds a B.A. (Hons) from the University of Kent, an M.Sc. from the London School of Economics and an M.B.A. from Nijenrode university.