Stocks Bounce in a Grim Environment
What is it?
While the economic environment is still tightening in the U.S. stocks have found some signs of hope in recent weeks.
“So far at least, most incoming economic numbers are less gloomy than forecast.”*
This had a positive impact on stocks as mentioned two weeks ago when inflation data came in lower than expected.
“Judging by Citi’s economic surprise indices, aggregate U.S. surprises remain positive and have been since September. Likewise equivalents for the euro zone, China and the world at large – with the UK surprises being most positive since April. That doesn’t mean economies aren’t slowing or even in recession – just that the data to date means market forecasting, and perhaps pricing, has been too negative on balance.”*
Why does it matter?
“Of course, that’s all in the rear view mirror. More forward-looking signals from markets are relentlessly dark.”*
Although stocks have rallied lately, we are not convinced that this move will continue. Instead, we believe markets are actually coming into another reversal to the downside. The environment is too harsh for companies to reasonably outperform estimates in the months to come. We do not believe that enough companies have the flexibility to pivot as conditions change and they may be left with lower profits than anticipated.
“As Thanksgiving typically sounds the starting bell for the following year’s investment decisions as well as the holiday sales season, retail readouts and related discounting will be crucial for central banks deciding when they can take their feet off the brakes next year.”*
The anticipation for retail is not as great as last year.*
“Workers at Amazon (AMZN.O) sites across the globe, including in the United States, Germany and France, were expected to go on strike on Black Friday. Production of Apple iPhones could slump by at least 30% at Foxconn’s factory in Zhengzhou after worker unrest related to COVID curbs disrupted operations.”*
As the environment evolves we will adjust our positioning. However, we have not seen a path to economic expansion in the next few months so our stance has more or less remained unchanged since our last Market Insight.
China’s Struggles Have Global Impacts
What is it?
The Chinese markets have struggled this year to say the least. As some countries have had signs of relief, that is not the case so far in China. It seems like one thing after another dampens the investor sentiment associated with China. They continue to have difficulties in terms of Covid and employee satisfaction.*
Why does it matter?
“German Chancellor Olaf Scholz said the number of German companies that have ignored the risks of depending too heavily on the Chinese market was remarkable and stressed the need for diversification, in an interview with Focus magazine on Friday.”**
While Germany has faced large sell-offs this year, they are not the only ones impacted from lack of diversification. The U.S. has a large amount of international dependence that cannot be understated. Companies that are not so dependent on a small number of underperforming countries may have lower downside risk.
“’The importance of the Chinese market needs no explanation,’ he said, but the goal is not to be dependent on any one market. I am therefore surprised at how dependent some companies have made themselves on individual markets and have completely ignored the risks,’ Scholz told the magazine.”**
While we may buy into Chinese related investments in the future, we are pleased with how our process has helped us avoid much of the downside risk recently seen in the markets. By investing tactically, we are typically not buying into falling markets. We remain patient until securities have sustained better momentum and trends along with other signals.
Other articles we found interesting this week:
Why Amazon plans to spend $1 billion making movies for theatrical release
European Parliament Website Knocked Offline by Cyberattack
FTSE 100 edges higher, retail stocks slip on Black Friday
Current 401(k) portfolio
Our last portfolio reallocation: 5/19/2022.
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Our process attempts to identify trends and momentum in the financial markets. With that information, we align our clients’ portfolio accordingly in the hope to help our clients accomplish their life goals while attempting to lower the risk of a large drop in their portfolio.
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Sources:
*Reuters. “Morning Bid: Gloomy enough?”. 11/25/2022. Reuters. https://www.reuters.com/markets/us/global-markets-view-usa-2022-11-25/
**Reuters. “Germany’s Scholz ‘surprised’ by companies’ China dependence”. 11/25/2022. Reuters. https://www.reuters.com/markets/europe/germanys-scholz-surprised-by-companies-china-dependence-2022-11-25/
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