Hawkish Fed drives (temporary) sharp weakness
- The Fed signalled higher interest rates could come earlier than expected, hurting equities, commodities, and boosting the USD. Tech and NASDAQ were resilient.
- We see markets well-supported and still favor assets tied to stronger growth, like commodities, cyclical sectors, and international markets vs tech and US.
- Strong earnings growth is the key insurance policy against higher market volatility. US expectations are for 35% growth this year, up 15 points from Jan. 1st. 2022 expectations are still far too low at only 12%.
- Longer-term, dividends are under-appreciated, at over ⅓ of total market returns, and showing power of compounding reinvested dividends — for example, giving extra 170% from S&P 500 the last 20-years.
Fed takes another step toward tightening
- The Fed became more ‘hawkish’ at its meeting last week, raising GDP but also inflation outlook, and bringing the rate hike view into 2023, and with early talk on cutting US$120bn/m bond buys. Many Fed members are due to speak this week, keeping policy in focus.
- Banks will benefit from higher long bond yields, an increased ability to return cash to shareholders, and are still the cheapest of all sectors. Fed ‘stress-test’ results due this Thursday will see a further loosening of share buyback and dividend payment restrictions.
Stock Market is not the economy. See small caps
- We all often use the shorthand of GDP growth for company earnings and the stock market. They are loosely connected but have big differences, with equities having a lot more tech stocks and overseas revenues, and a lot less small caps and government.
- Small caps are under-represented in stock markets but attractive in our view, as faster-growing and more exposed to the sharp GDP recovery now underway globally, and with a much broader opportunity set.
Bitcoin range-bound for now
- Bitcoin is in a narrow range after its recent -50% price fall, helped by valuation (stock-to-flow model), increased long-term holders, and it’s low equity correlation.
- Asset class saw more adoption news with Paraguay to follow El Salvador making BTC legal tender, and bank BBVA setting up crypto trading and custody.
Stronger USD drives commodity pullback
- The broad-based Bloomberg commodity index fell -4% last week under twin pressures of China’ plans to release supplies from its strategic stockpiles to curb recent price rally, and the strengthening of the USD raising purchase costs for overseas buyers.
- We see current pressures transitory and are positive about the long term outlook, with demand recovering and supply tight. Gold led weakness, falling -6%, with Brent crude oil showing further resilience, +1%.
The week ahead: Watch the growth divergence
- Growth outlook and regions’ divergence with monthly forward-looking purchasing managers indices (PMI) for US, EU, UK, Australia and lagging Japan (Wed).
- Likely no Bank of England (BoE) change at policy meeting (Thu). Already leads in ‘tapering’ back its bond market purchases as the economy rebounds.
- See Q2 results from Nike (NKE) and Fedex (FDX), analyst days at J&J (JNJ) and Glaxo (GSK.L), and Amazon (AMZN) ‘Prime Day’ retail extravaganza.
Written by a team of experienced financial analysts at eToro.
This content is for information and educational purposes only and should not be considered investment advice or an investment recommendation. Past performance is not an indication of future results.