This commentary was issued recently by money managers, research firms, and market newsletter writers and has been edited by Barron’s.
Is the Bond Market Right?
Aug 3: higher [bond] yields earlier this year drove equity prices lower, while the bond market’s recent optimism fueled the July rally. While the equity markets’ future will be interest-rate dependent, equity valuations are currently positioned at a slight discount to bond yields. With the exception of 2009 through 2020, when global central banks embarked on quantitative easing, the S&P’s forward price/earnings ratio traded in line with yields on 10-year, BBB-rated bonds. That’s the case this year. Most recently, the forward P/E has been incrementally below what the corporate-bond benchmark would imply, giving equity investors a slight valuation cushion in the event that yields, or more likely spreads, rise.
Bottom line: Like the Fed, equity investors need to be data-dependent, and the path of inflation is one of the most important indicators to track. If bond investors’ views are correct, equity markets are properly positioned. Investors in lower-quality corporate bonds, however, could be vulnerable to spread widening, particularly if lenders are accurately assessing credit risks.
Bear Market Rally
The Weekly Speculator
Marketfield Asset Management
Aug 4: The recovery rally by US equities took the
index back up to 4155. This puts it back in a range that includes the March lows, recorded just before the FOMC confirmed the start of the rate-hike cycle, and also the early June peak. As impressive as the rally has been, it took nearly six weeks to recover the points lost in just seven sessions between June 7, when the SPX closed at 4160, and the 2022 low of 3636, reached on June 17.
We are still of the view that we are witnessing a long and powerful bear market rally, and that the June low will be tested and surpassed, but it is always hard to differentiate between this phenomenon and the start of a new bull cycle from a technical perspective. Both tend to feature rapid and broad advances, particularly among names that had become the locus of short selling. Wednesday, in particular, saw notable advances by a number of crowded shorts, suggesting that a significant amount of covering took place.
Michael Shaoul and Timothy Brackett
Sticking With Wall Street
Trust Advisory Services
Aug 3: We are sticking with our longstanding US overweight. Overseas markets continue to underperform, hitting fresh relative lows, and geopolitical and macro risks remain front and center. We are further downgrading our international developed-markets view, to least attractive. And we remain negative on emerging markets, which are being hurt by slowing global growth and a heightened [negative] geopolitical backdrop.
On the fixed-income side, we recommend that investors take advantage of the roughly 6% rebound over the past month in high-yield corporate bonds to reduce allocations. Based on history, even in a mild recession, the potential downside for junk bonds is high. Likewise, we are downgrading leveraged loans one notch, given rising credit risk. Conversely, considering the deteriorating economic data, we are upgrading government bonds one notch, to neutral. Although yields are less attractive after the recent pullback, they should help to provide portfolio ballast.
A Risky Assumption
BMO Capital Markets
July 29: Does it sometimes seem like the laws of economic gravity have been repealed since 2020? [Since then]we have seen record budget deficits coincide with record low bond yields, negative oil prices suddenly morph into record fuel costs, the Canadian dollar and other commodity currencies weakening in the face of record resource prices, unemployment rates hitting multidecade highs and lows, and the European Central Bank clinging to negative interest rates, even as inflation punched above 8%.
The fun-house mirror effect remains in full force, as financial markets have rallied in the face of another meaty Fed rate hike and the second quarterly decline in GDP. In days of yore (ie, 2019), these developments would not normally have been greeted warmly by investors.
The reason for the buoyant market performance in the face of ostensibly bad news is to hope that much slower activity will soon cause inflation to crack, and that weak growth and calmer inflation will prompt a Fed pivot. While Fed Chairman Jerome Powell duly delivered all the obligatory messages about the inflation fight being paramount during his press conference, all the markets heard is that the Fed is now fully data-dependent and that there may be smaller rate hikes ahead. Markets slashed the amount of further Fed rate hikes in 2022 and built in even larger cuts in 2023, driving down yields.
We have no major quarrel with market pricing on the Fed through the remainder of this year. But we are much less convinced about a quick turnaround to hefty rate cuts in 2023. No doubt, growth will be struggling mightily next year, with the 0.9% dip in Q2 GDP perhaps just a taste of what’s to come. Alas, that provides zero guarantee that inflation will go quietly into the night.
Has a Recession Begun?
National Bank of Canada Financial Markets
July 28: Economic output shrank for the second quarter running in Q2, fueling discussions about whether the US is in recession.
There’s a difference between a “technical” recession—two consecutive quarters of negative growth—and an “official” recession determined by the National Bureau of Economic Research. The NBER website says it pays attention to a range of monthly measures of economic activity, but gives particular importance to real personal income (excluding transfers) and to changes in nonfarm payroll employment. [Based on these two measures]the odds that the NBER qualifies 2022’s first half as a recession are pretty low.
Jocelyn Paquet and Matthieu Arseneau
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