Investors have finally found their desire to take on risk after weeks of doom and gloom. After several weeks of declining, the US indexes turned slightly bullish. This small bullish bump came after the Fed’s most recent “minutes” and talk that suggested that the institution might be more cautious in tightening its policy to avoid a severe economic recession.
Last week was more optimistic than before, which saw fear reach a new peak. Many of the negative news seems to have been priced in. Prices are now reflecting the less favorable monetary policies of central banks since the start of the year and the expectation of disappointing results for the second quarter. Only a more profound and prolonged recession could further bring the market down.
Let’s not get too pessimistic or optimistic. The market is now back to its historical average value, and the main areas of overvaluation are gone. This allows you to accumulate at interesting levels and take advantage of market opportunities.
Investors seem to be more comfortable with central bank strategies and have integrated Fed Rate increases. Economic statistics are still not as favorable as expected.
These signals are still minimal, but it is essential to be aware of them. If a number fluctuates from the consensus, it could be an accident, and it’s a trend when below-expectation data begins to multiply. The Chinese government continues to be a hot-and-cold advocate for its stimulus programs, and many obstacles still hamper international trade.
All this leads me to think about one word – Stagflation.
Ray Dalio, Bridgewater Associates, CEO believes that we could be heading “into a stagflation kind of environment” because there is a credit supply and demand imbalance. “The most important issue is political because we have grown up in an environment where economics ruled. We are moving to an ideological allocation, as demonstrated by the Twitter acquisition by Elon Musk. This is not a financial transaction, but it is for control. Economics will need to be part of that agenda.” Dalio predicts this will have “very large implications.”
The Goldman Sachs Global Investment Research team concluded that while growth will slow down, inflation will continue to remit, and policy rates will rise in a recent document. The bank’s Risk Appetite Indicator has dropped dramatically. This indicates that manufacturing activity and growth optimism will likely decline as we move into the summer.
Goldman concludes that we are entering a stagflationary climate. They cite bond values falling, real rates declining, and high-risk premiums as reasons. Goldman calls the period ahead of the “Post Modern” cycle. It sees lower returns per year due to a shift in globalization to regionalization and increased spending by the government. Based on historical data, Goldman predicts that globalization reached its peak in the early 2010s and that inequality will decline over the next decades just as it did during deglobalization’s 1910s- 1970s era.
Recommendations from Goldman include companies with strong balance sheet stocks, such as utilities, telecoms, travel and leisure, food and beverages, personal care companies, and finally, renewables. We will release a list of our stagflation stock picks very soon to paid subscribers.
The US Treasury yields are clearly down these days. The 10-year maturity was 2.73% last week, ten points less than the previous week. Investors have a clear idea of the Fed’s future actions and don’t believe it will exceed its stated efforts to reduce inflation. The European yields didn’t experience the same correction last week. This is likely because the ECB confirmed it would be raising rates in the following weeks.
Bitcoin is still down around $31,000 as of this writing and appears to be recovering after weekly declines in this macroeconomic environment. The overall trend is still BEARISH, but we may start seeing support.
The tightening gasoline market in America, which saw inventories fall again this week, supports oil prices. Despite the US’s efforts to reduce its oil reserves, the buying market remains strong. Brent crude oil is trading at USD 117 per barrel, while WTI is around USD 113.
The global economic slowdown is weighing down the base metals segment, which is currently on hold. Copper is at USD 9000 per metric ton, which is its lowest point of the year. Over the past five days, nickel, aluminum, and tin followed a similar trend and fell overall. Precious metals saw gold experience a buying impulse that took its price to USD 1,870. However, this rebound was hampered by the sudden rise in risk appetite and the advancing stock market indices.
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