top of page

Market Comment - May

While central banks are trying to cool down the economy with rate hikes, governments continue to provide support via fiscal stimulus. The US is running a record budget deficit, due to discretionary spending, and both parties running for election in 2024, need a large budget for their election campaign. The debt ceiling in the US has been removed until 2025. Japan continues its yield curve control and China is stimulating via tax excemptions and rate cuts. Government initiatives like “the Inflation Reduction Act” in the US, or the “Gaspreisbremse” in Germany are supporting the economy. In addition, it looks like the “helicopter money” thrown at consumers during the pandemic is still not fully spent. The pent-up demand created by the pandemic proves to hold up longer than expected. While market observers might be surprised by the resilience of the economy facing sharply rising rates, the above observations may present an explanation. Excessive monetary policies initiate two processes – inflation and excessive risk taking, which becomes an integral part of the financial cycle. In 2020 and 2021, central banks engineered an unprecedented monetary acceleration. To subdue inflation running far above its target, central banks actions caused an unprecedented monetary contraction, which in turn, begun to increase the potential for significant failure among the reckless ventures originated from 2020 to early 2022. So the question remains, can governments counter the central bank’s destabilizing actions? With the increasing amount of debt, the ability to stimulate further will be reduced. The effectivnes of debt building to create GDP growth diminishes. However, the liquidity provided during the pandemic still outweights. During the second half of May, which usually provides bearish seasonality, we have witnessed a vertical acceleration in the technology sector, provided by the surge in interest for AI companies, to valuations we have rarely seen. Never, a company of the size of Nvidia has reached such extreme valuations, not even during the Y2K dot-com bubble. Despite rising rates, we are witnessing a P/E expansion and once again, the US stock market is dominated by a few mega large caps, lifting the year-to-date performance of the S&P500 to 8.86%, while the equal weighted S&P500, which is removing the capital weighted returns, is trading down 1.43%. We mentioned the echo bubble theory in the Feburary report. In the meantime, commodities remain in a bear market and treasury yields continue to trade sideways in a highly volatile fashion, making it difficult to make a prediction for the coming months. Our expectations are, that sooner rather than later, the economy will slow down, which leads to the conclusion that buying bonds at current levels will provide a better risk reward than equities. It could be, that interest rates are trading in a larger distribution, which would produce a lower downside target, once the top is completed.

Comments


Commenting has been turned off.
bottom of page