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Has The Market Hit The Bottom in May or Is This Just a Mirage ?

By:
Myriam Nir
Published: Jun 2, 2022, 14:07 UTC

As always, risk-management combined with rigorous sector and geographical diversification will remain key factors for investment performance.

S&P 500 FX Empire

In this article:

Equity Markets in May 2022

After ups and downs, or more accurately, downs and ups, May ended flat to slightly negative for most bond and equity markets, thanks to a strong rebound at the end of the month, after almost two months of falling markets, and even a bear market for the Nasdaq. Indeed, only the tech sector and consumer discretionary stocks lagged the others. They have erased 25% of their aggregate value since the beginning of the year.

Of course, and like the high price of the VIX (the closely watched volatility index) reminds us by being in the 25-35 range, neither the macro nor the micro risks are behind us, and there are lots of issues that need to be resolved before we again become optimistic, but this kind of breather was welcome by each and every (long only) investor.

Fundamentals

In fact, global problems are still very present. The war in Ukraine has entered its third month, and the geopolitical situation in Europe is getting worse. European Union’s leaders have agreed to ban 90% of Russian oil imports, sending the oil price back to a 14 years high, of $119.

China is slowly easing up on its Covid restrictions but still not enough to take it out of the current mess or to help with inflation, which remains a huge concern worldwide, for both households and central banks, with supply chain disruptions still in the background. On top of that, the last US earnings season showed that across the sectors, growth is slowing, higher costs are putting pressure on profit margins, companies are having difficulties forecasting consumers’ behavior and some have even been pushed to issue profit warnings.

A good indicator of stability though is the 10-year treasury yield, which was trading close to or even above 3% at one point, before stabilizing around 2.80% during the last week or so of the month. Another good indicator last month was the CPI (inflation rate) which fell for the first time since August 2021. If the rate missed analysts’ expectations and is still relatively high at 8.3%, and even if we cannot talk about a trend yet, it’s nevertheless going in the right direction, cooling off.

A drill down into the data also showed that the strong demand for goods is slowly transferring to services. Regarding one of the main sources of inflation in the tech sector, the global chip shortage that has lasted for over a year, President Biden was in Asia in May, and among other visits, he went to Samsung Electronics in South Korea, surely seeking to resolve this issue and to reduce reliance on China’s production. From a more political side as well, US Commerce secretary Raimondo said that a potential reduction of tariffs was on the table, in order to solve the” untenable” inflation rate. Maybe a bit of light at the end of the tunnel after all.

Federal Reserve Minutes and US Dollar

The minutes of the last Fed’s meeting revealed that most of the members don’t think a recession is underway, although lately most of the highly watched economic data has missed expectations. Actually, after the minutes of the last Fed’s meeting it was clear that all the members are determined not to crash the economy into recession. However, like in May, June and July as well should see rate hikes of 50 bps each, as combatting inflation remains the main goal. The Fed’s balance sheet reduction will also start in June with an amount of $47.5 billion at first and this is set to double three months later.

These Fed’s measures have a direct impact on the US dollar, which has strengthened this year vs the other currencies. Indeed, the US Dollar traded below 1.04 against the Euro, before returning to 1.07. Also, the late pricing of an aggressive monetary policy stretched the yields so much that USD denominated high yield corporate bonds reached an aggregate yield close to 8% at some point. Since last week, we see that this pricing gave a buy signal to investors who returned to the bond markets, and especially to the USD high yield universe.

Trading Strategy

From our side, only a few hints that things could improve soon are not enough for us to deploy right away the cash we have piled away so far, and so, we stay on the safe side, underweight equity, waiting for fundamental good news.

As always, risk-management combined with rigorous sector and geographical diversification will remain key factors for investment performance.

You are more than welcome to contact us to discuss our investment views or financial markets generally.

Sweetwood Capital Investment Team

About the Author

Myriam Nircontributor

Myriam started her career in the Financial Markets in 2006, as a Stocks and Derivatives Broker at Camalia Capital Markets.

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