Last night’s entry to our internal market log:

8/8/2022

Oil looks interesting here after the recent comedown. Brazil looks historically attractive going forward. Metals and miners are poised to be high-probability winners for years to come. And while we can argue on behalf of a strong dollar persisting a bit longer, the setup, in my view, for the next several years lends itself to an on-balance weakening trend. Hence, cheaper and higher yielding (than US) non-US (EM in particular) equities in general look long-term relatively attractive going forward.

Thing is — given that present Fed policy, amid a generally weakening macro backdrop, remains in tightening mode (with QT set to double next month) — odds that the latest (short-covering and gamma-hedging) rally will fail and give way to, at a minimum, a test of the bear market lows remain elevated.

But what if we don’t actually enter recession? Won’t corporate earnings indeed hold up, supporting a new bull market trend going forward?

Well, yes, in terms of earnings. However, a no-recession scenario, with its attendant animal spirits, will likely keep inflation elevated to the point that has the Fed maintaining its tighter stance far longer than markets are presently discounting. Which would provide a potentially serious headwind for equity multiples going forward.

In fact, equities don’t look to me like they’re remotely discounting the inevitable earnings decline that would occur should we enter recession… I.e., earnings estimates at this juncture are indeed suggesting there’s no recession on the horizon. In which case – assuming they’re correct – we don’t get the kind of Fed “pivot” that would produce the easy monetary policy conditions that we presume are necessary to support meaningful/sustainable upside in equity prices.

That said, any evidence that inflation is seriously coming off the boil will surely inspire rallies in global equities. But, again, rallies in equities are essentially a loosening of financial conditions. I.e., such rallies will likely turn out to be the short-lived victims of fed quashings.

Bottom line, much is left to play out before we get to a risk/reward setup that has us comfortably adding more risk to our core portfolio… Although, I must point out, much can indeed play out over just a matter of weeks, particularly if it involves a selloff in equities befitting the sort of bear market we believe we’re experiencing.

I still like that 3,500 SP500 level, assuming a mild recession…

Asian equities rose overnight, with 13 of the 16 markets we track closing higher.

“I find it HILARIOUS that people out there think that the government is manipulating data so that oil prices tank. No, maybe your forecast is wrong because your headspace is biased! DON’T INVEST BASED ON IDEOLOGY!!!”

–Marko Papic

Have a great day!
Marty