News
Opinion is split on the next movement for equities
August 16, 2022
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JPMorgan Says The Stock Rally Has Legs.
Morgan Stanley Disagrees
Rate-sensitive growth stocks likely to outperform, JPM says.
MS’s Wilson says disappointing earnings to push stocks lower.
Today's Expert Opinion is written by
Sagarika Jaisinghani
Top Wall Street strategists are divided on whether the US stock market is poised to extend its longest winning streak of the year -- or slip back after another false dawn.
Morgan Stanley strategists said in a note Monday that the sharp rally since June is just a pause in the bear market, predicting that share prices will slide in the second half of the year as profits weaken, interest rates keep rising and the economy slows.
But rivals at JPMorgan Chase & Co. said the rally -- which has pushed up the tech-heavy Nasdaq 100 index by over 20% -- could run through the end of the year.
“Is the rebound getting overdone and should one go back into value style? Not yet, in our view,” JPMorgan strategists led by Mislav Matejka wrote.
The schism reflects the highly uncertain outlook for the US stock market in the face of strong cross-currents. On the one hand, inflation is showing signs of pulling back from its peak and businesses have been expanding payrolls at a strong pace, both of which auger well for equities. Yet at the same time, Fed officials have signaled that they will continue to raise interest rates aggressively until consumer price increases are reined in, which risks driving the economy into a recession.
The JPMorgan strategists have remained among the few top-ranked bullish voices on US stocks this year even as equities marked their worst first-half rout since 1970. They said that the stock market may rise in the second half of the year, driven by rate-sensitive growth shares that have rallied as bond yields pulled back from their June peak. Any shift back into value stocks will likely wait until signs that US growth has bottomed out, according to JPMorgan strategists, which they expect in the fourth quarter.
Such optimism has become more common among investors since mid-June, after corporate earnings were much better than feared and data showed a slight cooling in runaway inflation. The S&P 500 ended Friday with its fourth straight week of gains, its longest weekly winning streak since November.
But Morgan Stanley strategist Michael J. Wilson, one the most vocal and staunch bears on US stocks, says the rebound is now overdone, citing the risks posed by the economy, tighter monetary policy and the outlook for corporate profits.
“The macro, policy and earnings set-up is much less favourable for equities today,” he wrote in a note, adding that disappointing earnings in the next few months could spark the next leg lower in stocks. “The risk/reward is unattractive, and this bear market remains incomplete.”
Stocks also face another hurdle from slowing corporate buybacks after a record spree so far this year. Although buyback authorizations have jumped 18% to $856 billion in 2022, actual spending on stock repurchases sank 21% in the second quarter compared with the first, Goldman Sachs Group Inc. strategists wrote on August 12.
Still, the strategists led by David J. Kostin said a 1% excise tax, which goes into effect next year, creates a “modest upside” potential to buybacks in the rest of 2022.
Our Thoughts
This is a typical dilemma that we see all the time in equities trading. Two powerhouses with almost unlimited funds for research, and they completely disagree with what happens next.
Anyone who thinks trading is easy, lacks experience.
The rally back in the US, and to a lesser extent in Europe, was some time coming. We all expected a bounce, but when that bounce was coming, was anyone’s guess. Many traders will have bought into this level the first time round only to lose another 10%.
Now that it has come back, some feel there is good reason for it to keep going, but we are very very unsure about that.
Often the ground in between strong opinions is the right area to be in.
There is little reason for growth stocks to rally much more. They are still expensive, and only the blind optimism of the Americans could make that happen – but that doesn’t mean it won’t.
However, as Morgan Stanley point out, there are just so many bad things happening in the economy right now, how can any rally in stocks make sense?
Costs for businesses are soaring and at some point, they will have to take the hit. We predicted a good earning season for the first half of the year, as much of what has happened won’t have any immediate impact to blue chip companies, but that can’t last.
Inflation is high, and we are fuelling it with pay rises. This time next year, inflation will almost certainly be under control, but that doesn’t mean things will be cheaper, that’s not how it works.
Inflation is measured month on month, and year on year. Compared to this time last year, prices are 9.4% higher. This time next year, if inflation is running at 2% as hoped, then prices will still be 2% higher than they are now.
The probability of a recession is now estimated at 75%, up sharply from 44% in early July and higher than any time since September 2020 when the pandemic was raging. The Bloomberg survey was carried out between 5thAug and 11thAug.
UK job vacancies fell today for the first time since August 2020 as real wages dropped at the sharpest pace on record, indicating a tightening inflation squeeze on consumers and businesses.
The number of jobs employers are seeking to fill fell by 19,800 to 1.27 million in the quarter through July, the Office for National Statistics said this morning. Pay excluding bonuses and adjusted for inflation fell by 3% in the three months through June, the most since records began in 2001.
“The labour market could ease further as the economy weakens,” said Yael Selfin, an economist at KPMG.
The impact isn’t just being felt in the UK though; things are looking just as bad all over Europe.
German investor confidence came out this morning and it fell further from already depressed levels as the burden of higher energy costs filters through.
The ZEW institute’s gauge of expectations slipped to -55.3 in August from -53.8 in the previous month, missing economists’ estimates for a slight uptick. An index of current conditions also deteriorated.
“The still high inflation rates and the expected additional costs for heating and energy lead to a decrease in profit expectations for the private consumption sector,” ZEW’s Michael Schroeder said.
Europe’s largest economy, which failed to grow in the second quarter, is reeling from lower Russian energy shipments that raise the threat of rationing in the coming months. Households face additional annual costs of about 290 euros after the government moved to spread the burden of spiking wholesale prices beyond utilities, further accelerating inflation.
As we said, there isn’t much good news anywhere at the moment, and a rally would make little sense.
Many equity strategists are eternal bulls; they can afford to be as talk costs nothing, and with it they risk nothing. Either JPMorgan is right, or Morgan Stanley is right but none of it really matters to the real investor.
On The Portfolio Platform, we recognise this. We wish we could tell you what is going to happen in the short-term, but we can’t, and neither can anyone else. What we can tell you, is that the market will go up, and it will go down, and our traders will do their best to make money. Over time, they should do exactly that.
Right now, several of the active strategies have gone short the market after a solid July. It is very hard to argue with this given what is going on in the economy right now. Stocks might not drop straight away, they might not drop at all, but if they do, these traders will look to capitalise.
Having said that, sometimes stocks go up when they should go down. That is why at The Portfolio Platform, we always suggest a tracker in a portfolio. The only way of picking up gains when most traders think the market should go down, is with a long term ‘buy and hold’ aka, a tracker.
Let the tracker work away in the background, while the active strategies take the foreground. Sometimes they will hedge with a short, sometimes they will boost the portfolio with a long. Not being able to do this is your real market risk.
The world is very likely to see a recession from many areas. Europe is struggling with the Russian conflict and with a 75% chance of the UK entering negative growth, Germany’s odds are even worse.
Many of our lower risk strategies are treading very carefully at the moment. They don’t want to buy just because it’s gone up and retail get excited when that happens. That is the short-term equivalent of ‘buying high’. Traders know better than that and will pick their moments.
If sentiment changes, then our traders will no doubt change with it. But our portfolios are for the long term, and it’s not something that should be rushed for a quick gain. Over the years, we look to outperform and that’s exactly what we intend to do for all of you.
For more information or if you are interested in building a portfolio on TPP please do contact us here.
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