Every cloud has a silver lining. There are plenty of reasons to be a bear. There are also plenty of reasons to be a bull:
1. US Investors Sitting on Record Cash
There is a ton of money to put to work if animal spirits pick up. Also, the conservative bias implies most investors remain relatively pessimistic despite YTD equity market gains. Possibly a contrarian indicator.
2. US Consumer is in Much Better Shape vs 2008
While the debt to GDP ratio for the US government remains concerning, the US consumer is actually in pretty good shape. The deleveraging trend that began with the Global Financial Crisis has pushed consumer debt service ratios near 30 year lows.
3. A Bear Market for Unprofitable Tech
Earnings is king. This perhaps explains the narrow big cap tech leadership. Tech companies with negative earnings are still down significantly from their 2021 highs. Arguably, the bubble in unprofitable tech (spurred by the pandemic) is deflated while the few big tech names with demonstrated narratives and earnings rally. The pessimist believes big cap tech names will converge with their unprofitable friends. The optimist argues the earnings laggards will catch up to their larger counterparts. Key here is to stay tuned into earnings trends.
4. Expect Inflation to Continue Declining
Perhaps inflation doesn’t reach 2%. Perhaps it falls below 2%. Regardless of where it ends up, CPI should continue to get dragged down by eroding money supply. The lags are long and variable. Pessimists believe tight money could trigger a recession. Optimists observe declining inflation and see a path to lower yields (and therefore lower discount rates used to value assets).
Key Takeaways from H2 2023 Market Commentaries by Morgan Stanley, State Street and Allianz
Morgan Stanley:
Global Economy and Investment Strategy: Expect a slowdown and divergence in the global economy in H2 2023 due to persistent inflation and tight monetary policies. Investors should be more offensive in Asia and defensive in the U.S. and Europe, considering assets such as long-duration bonds, Japanese and emerging market equities, and mortgage-backed securities.
Regional and Sector-level Opportunities: Anticipate significant regional differences in economic recovery, with Asia forecasted to outperform the U.S. and Europe. In terms of sectors, defensive stocks are favored in the U.S, while tech stocks hold potential in Japan, emerging markets, and Europe.
Market Expectations: U.S. and European equities may underperform due to falling short of earnings expectations, whereas Japanese and emerging market equities look promising. The U.S. dollar should stay strong, long-duration government bonds in developed markets may perform well, and commodities are predicted to see a return to normal conditions.
State Street:
We believe global growth will remain fragile through the remainder of this year and in 2024. Against this backdrop, our high-level takeaways for investors include the following:
Watch fixed income as it may present better return potential than equities
Exercise caution and emphasize quality when considering risk assets
Note how China’s reopening is steering the country into a new normal
Look at short-term bonds for income opportunities
Stay poised for the US dollar softening, a tailwind for unhedged non-US assets
Consider a downside protection strategy
Allianz:
With inflation still high and an economic downturn likely around the corner, we think it could be a bumpy second half of the year, particularly as markets may have to adjust expectations in key areas.
A good example: with the battle against inflation still not won, central banks may have to raise rates further – even after a pause – before they “pivot” to lower levels.
Turning points may arrive as economic growth slows and central banks re-evaluate interest rate paths – at which point investors might adapt their risk to suit market conditions.
With the right timing, potential entry points could surface in equities, high-yield bonds, and commodities. Look for companies with pricing power and those anchored around reasonable valuations and structural trends.
Resilience will be important – both for investors and corporates – as high rates may trigger further financial instability. Be watchful and ready for any opportunities.