There are three key drivers of the markets at this time:
- Inflation
- Chinese Lockdown
- Russia-Ukraine War
The Chinese economic reopening and a potential peak in inflation both went backwards last week/over the weekend, and we saw the recent gains in stocks given back.
On Thursday Chinese authorities reinstituted partial lockdowns in Beijing and Shanghai, and on Friday authorities announced there’d be mass COVID testing in Shanghai. This following the reopening of the world’s second largest economy less than a month ago… Friday’s CPI (Consumer Price Index || i.e. inflation) report essentially reversed the month of progress and hope we had going, signaling we may have not yet hit peak inflation. This data point makes it less likely the Fed will halt or slow its path to higher rates. 10-year Treasury yields have surged to levels not seen since 2011 driving mortgage rates well above 6%. This makes me wonder- Is the market doing the Feds job for them? Either way, it was a very disappointing past few days of data.
Looking forward, the outlook for the markets isn’t really any worse than it was on May 20th (when the market bottomed). In fact, there has been fundamental improvement. China is reopening, albeit at a slower pace now, and there is still evidence that inflation is peaking when you take energy out of the equation, and there have been no material changes to the Russia-Ukraine situation which could help to stabilize commodity prices and geopolitical tensions. That said, absent a much more hawkish-than-expected Fed (raising rates and tightening up liquidity more than expected), fundamentals do not warrant a major drop in stocks at this time.
From a technical perspective, testing major lows is a sign of the typical market bottoming process, especially when considering sentiment is historically low. Market participants in general do not like “V shaped bottoms” as it forces investors the “chase” the market higher. Making a “double bottom” or “undercut low” gives folks a chance to digest current information and craft a plan.
At this point, I am interpreting this retreat as part of the bottoming process. Caution is warranted as the situation is fluid and the markets are in a confirmed downtrend. Any sign of strength from here would certainly be well received and in line with historical mid-term election year trends while any signs of further weakness could spell major trouble that would require repositioning of recent “bottom purchases”.
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Important Disclosures: Past performance is not a guarantee of future results. The statements contained herein are solely based upon the opinions of Edward J. Sabo and the data available at the time of publication of this report, and there is no assurance that any predicted or implied results will actually occur. Information was obtained from third-party sources, which are believed to be reliable, but are not guaranteed as to their accuracy or completeness.