August 19, 2022
Good morning,
Readers of Wednesday’s Morning Note were understandably dissatisfied with what I described as diametrically opposed signals from bearish macroeconomic gauges and bullish technical signals (commonly referred to as the Tape), and the resulting neutral allocation recommendation. One reader compared the analysis to the classic two-handed economist – one the one hand, this could happen, but on the other hand…
I don’t think the characterization is unfair, I’m not thrilled by the sit still message either. In fact, the gap has only gotten wider in the past day. Last night, the Chief Global Strategist for NDR, made the slightest upgrade to equities from neutral weight to slightly overweight stemming from the shift in their Global Allocation Model (no change in the U.S. model). Meanwhile, over in the economics department, yesterday’s LEI release for July (Leading Economic Indicators) suggests a recession is likely in the near-term (6-8 months).
As mentioned before, these are unusual times with a Fed aggressively raising rates into a weakening economy. What has the market priced in thus far? *“Examining the recent performance of various asset classes, including global and international equities, the dollar, commodities, and fixed income during global slowdowns, based on historical norms, a moderate global slowdown has already been priced into most asset classes, but not a severe global recession. We maintain our view that we are in a moderate global slowdown, however the risk of a severe recession is likely to rise in 2023.”
I think one interpretation of the recent message-of-the-markets could be that a severe recession this year, priced into the S&P 500 with a 25% decline earlier this year, was too much. At the June S&P lows, the economy was just too strong, and the expected trajectory of rate hikes wouldn’t immediately crush it. If a moderate global economic slowdown is now priced in for late this year and into next year, then it does beg the question of how much upside is in equities from here. Furthermore, the risk of a deeper recession later in 2023 – which may be beyond the normal discounting period of the equity market – remains. We’ll stay neutral allocated for now, all things considered. I think long-term risk is still elevated.
I’m pulling the plug next week and enjoying a NYC – Stay-cation. No morning notes but I won’t stray far from the computer. See you in two weeks (Mon 8/28) –
Be well,
Mike
*Alejandra Grindal – NDR’s Chief Global Economist