risk here. Even if the market looks positive. Don’t get ahead of your skis in this. Markets can go downhill quickly.
Outside the Federal Reserve, 15 other central banks are joining the rate-raising mania. This is the #1 stock market issue at the moment.
It is as if the only answer to inflation is to reduce consumption. The other answer is to increase production. Which means you make more stuff,” says Vladimir Signorelli, president of Bretton Woods Senior Investments in Long Valley, NJ. “More stuff means lower prices.”
A new trend of macro volatility is emerging. Business activity is declining and US inflation remains above 8%. It’s closer to 9% in Europe, worse than large emerging markets Brazil, India, South Africa and China. Within the BRICS countries, only Russian inflation is worse than in Europe and the United States
This means that the Federal Reserve, the European Central Bank, and the Bank of England are chasing inflation by raising interest rates even though they are aware of the damage to growth.
“Policy projections have jumped further since we downgraded developed market stocks in July — and recession risks are still not factored in,” says Wei Li, senior global investment analyst at BlackRock Investments Institute. They underestimate the weight of the United States and Europe.
Business halted in the US and Europe, with FedEx last week
BlackRock’s Lee believes the Fed and European Central Bank will “overreact”, especially to any bullish inflation surprises. She predicted that policy would be “too tight,” she says, implying a recession in the core economies. “Our all-portfolio approach prompts us to reaffirm our view on risk reduction,” Lee says.
The Federal Reserve and the European Central Bank are very negative
Recent economic data from the US has been lackluster, although the labor market remains strong.
Last week's retail sales data had a negative impact on the pace of consumer spending, and the Atlanta Fed lowered its now-tracking GDP estimate for the third quarter to just 0.5% annually, down from 1.3% previously. The only positive is that it ends the technical slump caused by the two successive quarters of negative GDP. Now that the US is starting to climb, some investors may come in and buy at the lows. But there is consensus in the market now that bigger bottoms are coming. Investors can wait for deeper discounts in global stock prices.
“It is important to remember that the Fed only cares about economic growth to the extent that it affects their two states, which are price stability and full employment,” said Solita Marcelli, CIO for the Americas at UBS Financial Services.
Last week, lower gas prices helped curb inflation to 0.1% on a monthly basis, but the overall CPI showed an increase of 0.6%. Stubborn inflation has raised fears that this is now entrenched.
"We still think the underlying trend is towards slower inflation," Marcelli says. "But at this point, it doesn't look as if the Fed is on track to reach the 2% inflation target in an acceptable time frame."
Meanwhile, across the pond, the European Union is doing what Western governments do best these days. To handle crises, including those it does themselves, enact emergency powers to gain more control over the economy.
The European Union has suggested that emergency powers for the supply chain would be a big deal, if it pays off. For Wall Street, this suggests that Europe will be a more difficult market to sell. “If it becomes more of a proposal, it means more federalism is coming for Europe,” Signorelli says, a move that would eliminate much of the sovereign power of individual member states.
"It could mean more predictability for the markets, but it's all still in its infancy," Signorelli says. “I wouldn't be short, but I wouldn't buy any European stocks at the moment. German economic power, without cheap energy, no longer exists. They have to figure out a way to keep it. If I had a European portfolio to manage, I would have to figure out a way to keep that,” Signorelli says. I'd rather buy British stocks." "Love it or hate it, (new Prime Minister) Liz Truss has the right idea on tax and energy - lower taxes and increase energy production."
BlackRock is reducing the weight of the US and Europe, but remains neutral in emerging markets.
China's economy is back in stimulus mode, although this won't be the diversified Chinese stimulus package in your garden. The Chinese stock market is in deep bear territory, so investors may react to this spending and start buying big Chinese ETFs like FXI MCHI and ASHR.
Consumer demand is still weak in China. Real estate prices have plummeted and lockdowns have continued due to the coronavirus, most recently in Chengdu.
Data released last week showed industrial production rose 4.2% year-on-year as drought conditions and electricity shortages eased. Investment in fixed assets in the first eight months of the year was up 5.8% from the same period last year, indicating that the infrastructure stimulus was rapid.
The renminbi is trading at nearly 7 against the dollar, its weakest level since May 2020.
Uncertainty will remain high due to inflation. Even President Bidens' recent announcement of the end of the pandemic phase of Covid, which would have cheered the market earlier this summer, did little to lure the bulls into the market.
"We see a limited uptick through June of next year," says UBS's Marcelli. “Selectively add to exposure. We prefer defense, income quality, and value stocks.”