Holding and waiting
"It’s tough to make predictions, especially about the future.”
Yogi Berra
Summary
The impact on consumers of higher energy prices is filtering through to slower real economic growth. However, with prices rising faster than wages, corporate profits continue to drift higher.
In the short term, household spending is likely to be shifted away from discretionary spending (holidays and leisure) to food and energy spending. How governments react to the pressure on household budgets may determine the shape of the economy in coming months.
Central Bankers are stepping up the pace of monetary tightening, with significant increases in interest rates expected over coming months. The combination of higher interest rates and falling real incomes may be a toxic mix for real economic growth.
Whilst in the short-term equity markets appear oversold , positioning as a result of fund flows over the past two years does not yet appear to be overly bearish. Sustained equity market progress may depend on the outlook of peace, policy and profits.
Markets
In the short-term equity markets appear oversold. A sign of this is shown below, where the chart reflects the level of the US S&P 500 and the gap between the 40- and 200-day moving averages. When the market is oversold then the 40 -day moving average is below the 200-day moving average. Whilst this signal is only one of the indicators we use to assess market sentiment, many of them are reflecting similar ‘risk-off’ capitulation. This does not preclude the risk of further market falls if the broader economic situation deteriorates but does reflect that some, if not much, of the bad news is in the price.
The 40-day moving average is below the 200-day moving average of the S&P 500 suggesting that the equity market is oversold in the near term.
Source: Bloomberg, Artorius
Given the on-going conflict and policymakers talking about increasing interest rates more quickly than previously expected, markets have been relatively stable over the past month. Defensive (non-bond) strategies have continued to perform better than those strategies with exposure to growth or technology companies that continue to be derated by investors in the face of rising interest rates.