- Worries about inflation have been joined by concerns over a recession, one that central banks may either spark off or worsen in their efforts to reign in the effects of inflation.
- Although cash is being whittled away by inflation, perhaps sitting on the sidelines for now may not be the worst thing to do.
If you’re wondering why the markets appear to be swinging from optimism to pessimism on practically a daily basis, that’s because the global economy is throwing off nothing but conflicting signals.
As markets lurch into the final week of May, there may be some truth to the old market adage, “sell in May and go away.”
Last week marked a potential tipping point that could in the future be seen as the watershed moment for markets when a selloff that started in the most speculative assets and technology stocks, spilled over to profitable and established blue chip firms in a rout that has become far more broad-based.
Worries about inflation have been joined by concerns over a recession, one that central banks may either spark off or worsen in their efforts to reign in the effects of inflation.
Consumer goods, typically viewed as a relatively safe bet in times of economic uncertainty, have provided no harbor as last week earnings from two of America’s biggest big box retailers, Walmart and Target disappointed.
Although sales at both Walmart and Target were up, profits fell because of increasing costs and tightening margins, causing shares of both companies to experience double-digit price falls, something investors would be more used to seeing in riskier tech stocks.
And that was enough for the market selloff to spread to other consumer staple stocks, which had nothing to do with the situation.
Until fairly recently, analysts were convinced that stocks would remain resilient, especially given strong corporate earnings and buoyant U.S. consumption.
But these sanguine views are being challenged especially when even the most powerful retailers appear to be struggling to pass on cost pressures.
In the past, the withdrawal of liquidity after years of cheap money had typically hit the most speculative assets hardest, notably cryptocurrencies when the U.S. Federal Reserve attempted to hike rates in 2018.
However, this time looks different because investors are wary that the Fed’s tightening in response to inflation will dovetail with other problems elsewhere.
China’s doubling down on its zero-Covid policy is crimping domestic growth and snarling supply chains while European consumers are being squeezed by soaring energy costs and a war in their backyard.
Europe’s factories export plenty to China, but consumers there are hardly in the mood to buy anything – not a single car was sold in Shanghai last month.
All of which leaves the market on the verge of a tipping point and investors are understandably concerned that if a steeper slide is triggered, the swing on the downside could be magnified by structural issues.
The world has grown more interdependent than ever and yet could not be more polarized.
Younger investors who have only ever known loose monetary policy are now having to contend with a possible bear markets and central bank hawkishness.
Even supposed haven assets like gold and U.S. Treasuries are being hammered.
While investors may be tempted into commodities and energy stocks, a global recession would all but guarantee that they collapse as quickly as they rose.
Given how high commodity prices have already been bid up, investors whetting their appetite for some of that action, drawn by the previous multiyear lows the industry has suffered, may be walking into a bear trap.
Against this backdrop, what can investors do?
Although cash is being whittled away by inflation, perhaps sitting on the sidelines for now may not be the worst thing to do.
Instead of trying to catch the lowest low or the highest high, watching to see where the chips fall may set investors up for some long-term profitable trades, especially when the directional momentum is proved to be durable.