Blain’s Morning Porridge, May 31 2022 – Where go Markets? Up, Down or Shake them all about?
“You put your left leg in, your left leg out, and shake it all about…”
This morning: Dead Cat Bounce or a renewed upside trend? The range of opinions and views on where markets are headed is diverse and confused – will bonds and stocks recover, or will energy, food and inflation shocks further destabilise sentiment. These are dangerous times, but fools will always rush in.
Trying to write a market commentary the day after a US holiday, and when no seems to be actually working in the UK, would normally be a problem. Y’day my phone-calls were largely ignored, emails were left unanswered, and even the comments page was pretty empty as the UK takes advantage of the Long Jubilee weekend which runs through next Monday
In these markets, there is never a shortage of things to comment upon… I’ve seldom seen such a mixed bag and wide range of market expectations:
- There are the optimists arguing the markets have already bottomed, and this is a buying opportunity. With the US stock market briefly touching a 20% correction, now it’s into recovery phase. They point to the possibility/likelihood the current energy shocks will be resolved, inflation will quickly reverse, and China’s reopening (aside from a critical lack of shipping containers – the modern weak-link equivalent of a horseshoe nail), will trigger a bull market.
- And then there are the realists – arguing the correction has only just begun, and there is much more pain to come for bond markets in terms of widening corporate spreads as recession risks rise, and rising rates undermine zombie corporates and overextended consumers.
As always, the truth is out there, and probably lies somewhere on the above spectrum – If I knew what’s going to happen next.. well, I would not be here early each morning writing about it..
The current market – which I described y’day as dead-cat bounce – looks like a classic market bear trap to fool traders. It has that feel. Tying to trade ahead of volatile market sentiment is never a smart move, and as June morphs into July expect to see liquidity and volumes drop. Yet, there are clearly value propositions and stories out there that will prove brilliant trades – trying to spot them is always the problem.
The big question is where to be invested in a fraxious, uncertain market? It depends on your belief system. This is shaping up to be a really difficult year for asset managers – 10-years of double digit returns now look negative, and you are only as good as your last numbers. There are few portfolio heads who can show positive returns. It’s at times like these when it becomes tempting to play hunches – which is bit like going to the casino despite knowing the odds are stacked…
If you are an optimist and you believe stocks are going to resume their upward trajectory since 2010 – be my guest. If you think inflation is still transitory, and will fall as swiftly as its risen, then don’t worry about bonds or central banks. Perversely, I think sentiment will favour the narrative markets are in recovery – most financial professionals have never seen an inflated asset bubble burst before. You’ve got to be in at least your 40s to remember what real pain feels like.
If you are a realistic pessimist… bonds are going to get spanked further, stocks remain unsettled and potentially more to correct.. So where to invest? Gold pays no return, yet has hardly moved as a reflection of how unstable the world is. Property – rising rates, landlords feeling the pain from defaulters, and rising fears a property crash is around the corner makes it look unattractive.
How to play it?
UK – existential crisis
Meanwhile, back in Blighty, the Bank of America has been dishing the UK; analysts writing we face an “existential crisis” which puts the UK on course for something akin to an emerging markets destabilisation event. Problem is – they are right. The outlook for sterling is “grim”, as they describe it.
It was also completely avoidable. Political Common Sense in the UK seems to have left the rails, lurching from wobble to wobble. Not only is the relationship with Europe heading back into crisis, but communications from The Bank of England are “increasingly challenging” (says BOA), and it’s independence looks threatened. When the central bank loses credibility, time to check the proverbial lifeboats.
The Bank of America report gels with many of the fears I repeatedly hear from major UK investors – the UK has become a metaphor of Boris Johnson – bumbling from crisis to crisis, and never really solving any of them. Muddling-through has, once again, become the UK’s default mode. To be clear, I’ve met many MPs and most of them are ok, but collectively… they’ve lost the plot. The political headlines are always going to be about crisis, wrongdoing, and political failure – but there is diminishing confidence in whatever path they are supposedly leading the nation.
Covid, Partygate and leadership challenges are distractions – but they now set the sterling and UK market narrative. The real crisis is a distracted government failing to come up with clear, effective or considered strategies on any of the critical challenges facing the UK:
- How to take advantage of the Brexit opportunity to launch a new economy – too late, that boat has sailed.. (Boris has come up with a new wizard wheeze of a European commonwealth with less rules than the UK.. yawn…)
- How to refine industrial policy in the wake of covid supply chain breakdowns.
- How to address new logistical challenges blockages in the wake of deglobalisation,
- Energy transition strategies and planning long-term strategic energy security remains an absolute mystery.
And there is much to add to that list; like the NHS, Railways… etc, etc…
Five Things to Read This Morning
Out of time and back to the day job..