Market Updates

Markets Update – June 2022

Goldilocks and the 3000 Bears
3000 to 1 feels the right ratio for bears versus bulls as we enter the summer. Long running investor sentiment indicators, asset management positioning data and stock market trading indicators are all at levels post major traumatic events (September 11th, March 2020 Covid epidemic). 3000 is also the level on the S&P 500 that the most vocal of negative commentators seem to be predicting. That would entail a further 25% fall from here after the 20% fall we just had which is already one of the worst starts to a year for the US market in History. This extreme negative emotion however is now at odds with the positive evidence building.
Although the war in Ukraine and recent Chinese covid lockdowns have exacerbated the issues facing investors this year, the expected sharp tightening of central bank policy is at the heart of all the drama. When inflation in the US proved to be more political than transitory the Federal reserve forced about 3 years of tight policy into the market in 3 months. It is therefore why we take most comfort from the fact that all the evidence is indicating that we are at peak inflation and therefore peak policy tightening. The policy tightening cycle could be over even before it begun. The bond market in the last 6 weeks has begun to reduce the number of rate hikes it is expecting this year. Commentary from Fed Officials now mentions “pausing in September” or “cutting rates in 2023”, representing a sharp softening in tone from earlier in the year. Bond market indicators of longer-term inflation expectations have cratered, back to where they were late last year and when the market was 20% higher.