Market Update – Some Truth To Both Bulls And Bears

By June 7, 2022Articles

Stock bulls point to the following factors in the market’s favour:

* Sentiment is already very depressed

* the direction of interest rates is already correctly incorporated by the market

* The US consumer, in spite of high inflation, remains in good shape, with healthy balance sheets, much lower debt than going into the 2008 GFC, and a strong labor market

* US companies have healthy balance sheets and are in good shape; there are not at all the kinds of excesses in leverage etc that were around before other major recessions/market crashes

* The global banking sector is in decent shape, with much higher reserve ratios than before the GFC

* We are already at peak inflation and inflation numbers will soon start to ease

Stock bears counter that:

* The Fed is so far behind the curve that the only way they can get control of inflation this time is by moving far beyond the “neutral” interest rate (expected to lie around 2.5%)

* The Fed has not even started its Quantative tightening yet – this will drain further liquidity from the market

* Earnings estimates are too optimistic and will be slashed as companies’ margin troubles become apparent

We currently see truth in both arguments, to some degree.   The Fed still has a pathway to a “soft landing”, and will be able to raise rates and control inflation (to around 3%- so a bit above their previous targets) without causing a recession in the process.  But they WILL need to slow down the economy in order to get there, and this is always a delicate exercise with room for error.

More market updates to come soon.

 

Date of posting: 7 June 2022

By Marianne Rameau, ASIP, Portfolio Management Team, ISGAM AG

Contact: enquiry@isgam.ch

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