The Bearish Backdrop..
Our trading comments for today first:
Our model is starting to deploy on the long side the 20% of the portfolio that we use for long/short hedging. Starting small with SPXL 3X longs at 85.45, just 2% of portfolio for now as it probes the market prior to forecast push through 200 day after Jackson Hole. The trading ladder that the model is using to deploy cash into SPXL is 81.20 to 81.70, so we are in early stages.
And here is the bearish backdrop that gives a contrarian stance, legs:
Wall Street Bears Take Revenge After a $7 Trillion Rally
Fed is years away from meeting its inflation target, survey of market participants shows.
Tatiana Darie and
Jess Menton Bloomberg 8-21-22
A sober warning for Wall Street and beyond: The Federal Reserve is still on a collision course with financial markets.
Stocks and bonds are set to tumble once more even though inflation has likely peaked, according to the latest MLIV Pulse survey, as rate hikes reawaken the great 2022 selloff. Ahead of the Jackson Hole symposium later this week, 68% of respondents see the most destabilizing era of price pressures in decades eroding corporate margins and sending equities lower.
“This is a bear-market trap,” Victoria Greene, founding partner at G Squared Private Wealth, said in an interview. “Inflation is the big, bad boogie man. Even if there really is a sustained decrease in inflation, it could take a while before prices actually come down significantly.”
Long Path to 2%
How long before the Fed brings inflation down to its 2% target?
Source: MLIV Pulse survey running Aug. 15-19.
The survey results spell trouble for dip buyers, who have re-emerged after the horrendous first half — driven by bets on a less-hawkish monetary tightening cycle while a slew of quant funds have shifted to a bullish positioning. In turn, shares around the world have clawed back some of the worst losses while the 10-year Treasury yield has fallen back to around 3% from the peak near 3.5% earlier this year.
MLIV respondents, for their part, reckon bond prices are set to dip again over the next month, with Fed Chair Powell having an opportunity to renew hawkish market expectations at the gathering this week in Jackson Hole, Wyoming. US equity futures fell Monday along with stocks in Europe ahead the annual retreat.
Fed funds futures currently show traders are betting the central bank will stop hiking after raising the benchmark to 3.7% and will start cutting as early as May 2023. Yet even the doves are pushing back, with Minneapolis Fed President Neel Kashkari recommending a 4.4% rate by the end of next year.
It’s hard to overstate why all this matters. A fast pace of monetary tightening, and the resulting economic fallout, is the biggest risk for money managers all over the world, with interest rates a key driver of corporate valuations. The bad news, per survey participants, is that inflation will deliver a meaningful blow to margins, pushing stocks lower.
While inflation’s effect on profit margins is very much an open question, the majority of MLIV readers appear closer to the bearish spectrum of a heated Wall Street debate on where stocks are headed. As elevated prices persist, consumers are likely to buy less during the next six months, a majority of respondents say.
Bears Have It
In current inflation environment, will stocks …
Source: MLIV Pulse survey running Aug. 15- 19.
That’s in line with warnings from the world’s largest retailer, Walmart Inc., that soaring inflation is forcing shoppers to pay more for essentials at the expense of other discretionary items. A cutback in consumer spending would impose a clear drag on profits posted by S&P 500 companies, which are also grappling with higher wages, rising inventories and continued supply-chain problems in China.
While the S&P 500’s margins peaked a year ago, the trough may not come until the fourth quarter, according to Bloomberg Intelligence. Consensus estimates for net-income margins have fallen about a half percentage point for both the third and fourth quarters since the start of this earnings season, with communication services, health care and consumer sectors among the weakest groups, BI data show.
Inflation Will, Over the Next Six Months …
Source: MLIV Pulse survey running Aug. 15- 19.
Pulse contributors also reckon unemployment is likely to rise above 4% but not higher than 6% — a worrisome level that’s higher than what policy makers are anticipating but lower than in previous severe economic downturns. That offers some comfort that any recession would be short lived, providing a dip-buying opportunity for risk assets.
“It’s rare for the Fed to aggressively tighten policy without causing market volatility,” said John Cunnison, chief investment officer at Baker Boyer Bank. “Stocks aren’t wildly cheap right now, but they’re not as expensive as they were six months ago, especially growth companies.”