History shows that turning points in bear markets occur at the points of maximum pessimism where there is almost a vacuum of optimism.
Although markets initially reacted well last week, as US Federal Reserve chairman Jerome Powell pushed back against incremental 0.75 percentage point rate increases (the actual hike was 0.5 bps), markets have since tumbled. As a result, the S&P 500 has now fallen for five straight weeks, its longest retreat in ten years, having slumped 18% from a record on the year’s first trading day, and wiping about $6 trillion from its value.
The relentless selling has many analysts searching for signals as to whether enough froth has disappeared from markets. In a survey conducted by Dave Lutz at Jones Trading, there were few signs of positivity: Participants cited factors such as an absence of heavy trading volume; the cutting by hedge fund managers of their equity exposure to fresh lows; and retail investors not yet having reached the point of capitulation which typically marks the trough of bear markets.
At Dynasty, we believe it is difficult to call market directionality in the short-term, especially because of the unpredictability of extraordinary risk factors that are now prevalent, such as the war in the Ukraine with its inflationary impact on food and energy prices, together with supply bottlenecks in China caused by the Covid-induced lockdowns.
However, over the medium-term, we construe the current bear market as an iteration of previous downward cycles, in that markets will turn when all bad news that is currently priced in, turns out to be excessive. To this end, our research points towards a recession not being inevitable, with the Federal Reserve stating clearly that they are not contemplating far more aggressive rate tightening; that Powell has tried to remove uncertainty in terms of the future path of monetary policy; and that consensus earnings growth for the S&P remains positive.
In summary, we believe inflation in the US is now peaking, and that there will be a softer landing for the economy than generally feared, although admittedly, this would be accompanied by a slower growth environment.
A catalyst that could well turn the current bear market is a sign that monetary policy is indeed proving successful. This would be signalled by lower inflation numbers without a collapse in economic growth – a much more successful outcome than is being priced into markets at present!
“If you can invest your money under fair conditions, in fact under attractive specific conditions, I think one certainly should do so even if the market should go down further and even if the securities you buy may also go down after you buy them.”
– Benjamin Graham, British-born American economist, professor and investor
“It’s hard to play the range in terms of the very short term, just because of the unpredictability of what’s happening in some of the risk factors.”
– Jeremy Zirin, senior portfolio manager and head of private client US equities, UBS Asset Management
Global News
- News of the week is all about consumer price inflation: In the US, the CPI increased 8.3% from a year ago, higher than the Dow Jones estimate for an 8.1% gain, which represented a slight ease from March’s peak but was still close to the highest level since the summer of 1982. According to UBS: “While there are higher wartime energy prices, this has created some demand destruction, with budget-constrained consumers limiting non-energy spending, which may be another disinflation impulse for non-energy goods.” This data showed that where demand fell, inflation slowed or turned to deflation.
- Too little too late perhaps? The Washington Post puts it like this: “Noodling with interest rate hikes, that are both too late and too small, and trimming morsels off their swollen balance sheets won’t prevent inflation soaring toward double digits. But crashing into recession to compensate for being asleep at the stimulus wheel for too long would just be a different flavour of failure. What’s needed is for fiscal policy to shoulder more of the economic burden.”
- Chinese consumer prices climbed at their fastest pace in five months as widespread Covid-19 lockdowns across major cities hit supplies of household items, but remained relatively benign despite surging global commodity costs, which have forced central banks elsewhere to rapidly raise interest rates.
- The inflation rate in Germany, measured as the year-on-year change in the consumer price index (CPI), stood at +7.4% in April.
- In Russia, concerns that its economy could collapse appear to have been overstated, as the country seems to be keeping up with payments of its foreign-currency bonds. The real economy is surprisingly resilient too. This is despite Russian consumer prices having risen by more than 10% since the beginning of the year, as the ruble’s initial depreciation made imports more expensive and many Western companies pulled out, reducing supply. The number of firms late on their wage payments, however, seems to be growing.
- At the same time as the spending power of the US dollar has been further eroded by inflation, the value of Bitcoin has collapsed more than 20% in the past month. If Bitcoin was construed as a currency, this type of movement would be regarded as hyperinflationary.
- As a decentralised asset class, Bitcoin allows for a variety of things to happen, such as the recent raising of financial aid for Ukraine; almost all was done via crypto to protect it from intervention from opposing forces, with close to $100 million raised for the Ukrainian government to aid in the fight against the Russian invasion.
- Stocks such as Amazon, Disney, and Netflix are now trading at levels lower than the pre-Covid crisis.
- The Elon Musk takeover of Twitter is apparently “on hold”: Musk tweeted today that the $44 billion deal is temporarily on hold until he receives more information about the proportion of fake accounts. The statement caused Twitter to slump by 20% in pre-market trading.
- As at yesterday’s close, the S&P was down 4.69% for the week.
Local News
- A recent BusinessLive editorial stated that South Africa was watching President Cyril Ramaphosa very closely ahead of December’s national elective conference. The embarrassingly chaotic scenes during the Eastern Cape conference this past weekend are suggestive of what can be expected in the months ahead. It also paints a vivid picture of the factional tactics within the ANC, not least of which include the resurgence of Ramaphosa’s CR-2022 campaign.
- This comes as South Africa is headed for a record year of electricity cuts if the rate of power station breakdowns fails to improve, particularly at coal-fuelled plants. Various generating units and other issues caused by a lack of maintenance have again put the country into the position of having to endure rolling blackouts at short notice. Nationwide cuts have occurred on seven of the first ten days in May, according to data compiled by Bloomberg.
- According to an article by Daily Maverick, the country is characterised by both “the haves and the have-nots”, seemingly having given up on the state. The liberation movement that governs appears to be running around dousing flames among its followers, recycling politicians with sticky fingers, and continues to mainline on second-hand toxicants. As a result, we have a situation where the state is lurching from one crisis to another as it becomes lost in transformation. The result is that all South African citizens are needing to step up to do what government has failed to deliver.
- When the ZAR/USD exchange rate reached a closing level of R14.51 to the US dollar on 12 April, our proprietary currency model estimated that the fair value for the exchange rate was R16.21. It was interesting to note that the ZAR/USD exchange rate reached that exact same level on Thursday morning. In the interim, the US dollar has continued its strengthening path, while driving up our estimate of current fair value to R16.86. The positive South African-specific tailwinds that supported the ZAR/USD exchange rate since early November 2021 have changed to strong headwinds as lingering and new domestic pressures now dictate the exchange rate path. The rand was again trading at R16.21 to the dollar at the time of writing, having weakened by 1.3% for the week.
- Meanwhile, South Africa could unlock almost R100 billion in investment by the mining industry if it clears the red tape holding back new mining and renewable energy projects planned by industry. The Minerals Council of South Africa estimates the companies in the sector have R30 billion of capital projects waiting for regulatory approvals, with a backlog of 4 500 outstanding mining and prospecting licences at the Department of Mineral Resources and Energy, which is preventing them from going ahead.
- At the time of writing, the JSE ALSI was flat for the week.
