August 14, 2022

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Wall Street rallies after tough first half - Olaf Chen warns: - We don't dare buy when too much negativity happens

Wall Street rallies after tough first half – Olaf Chen warns: – We don’t dare buy when too much negativity happens

At the close of trading, it looked like this for the leading indices on Wall Street:

  • The Dow Jones Industrial Average, which is made up of 30 carefully selected supposedly important stocks, rose 1.05 percent.
  • The S&P 500 Index, which consists of 500 of the largest listed companies in the United States, rose 1.06 percent
  • The Nasdaq Composite Index, which is dominated by technology companies, rose 0.9 percent

The rally comes after the leading S&P 500 index posted its worst first half since 1970 with a drop of more than 20 per cent. Admittedly, the stock market peaked around the new year, after two years of runaway returns. That doesn’t change the fact that shareholder values ​​of over NOK 80,000 billion have been carved out of the companies included in the index so far this year.

The interest rate on ten-year US government bonds, often cited as the most important in the world for its impact on other interest rates and financial variables around the world, is now 2.9 percent. Interest rates fell and fluctuated sharply on Friday, now down from a peak near 3.5 percent in mid-June.

– It was the talk of the day. It’s simply out of fear of recession, says Olaf Chen, head of global allocation and interest rates at Storebrand, by phone from Sicily.

Technical slack

A number of disappointing headline numbers were received for the world’s largest economy on Friday. Among other things, the ISM survey, a kind of expectation indicator among US purchasing managers in the industry, was lower than expected.

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– There is no doubt that it is a challenging scenario now. Christian Lee, chief strategist at Formue, says that central banks must tighten in an economy where growth is declining, and all other things being equal, there is no recipe for success, and continues:

Chief Strategist at Formue Management Christian Lee.

Chief Strategist at Formue Management Christian Lee. (Photo: Dedrick Linerod Arnesen)

One can have a situation where the only way to lower inflation and wage expectations is a more relaxed labor market. The central bank should reduce the number of vacancies without increasing unemployment too much, which is a delicate balancing act. What is observed from the ISM indicator is that the employment component is declining, and this makes the whole thing more difficult.

Disappointing ISM numbers led the Atlanta Federal Reserve’s GDPNow index, which consistently estimates economic activity in the United States based on key numbers, and now estimates negative annual growth of 2.1 percent in the second quarter. Annual growth is the growth you would get if the quarterly change lasted for an entire year.

The US economy contracted 1.6 percent in the first quarter. The simple definition of a recession is two consecutive quarters of negative growth. After updating the GDPR now, it tells me:

– If this proves true, then there is already a technical recession in the US economy.

However, it was the National Bureau of Economic Research (NBER) that officially established recessions in the United States. The government agency uses the definition of “a significant decline in economic activity that extends over the entire economy and lasts more than a few months.”

– It’s heading for lower growth. I think you can have a technical recession with two consecutive quarters with negative GDP growth, but I don’t think we will have a recession until there is a sharp rise in unemployment. Historically, a soft landing has been very difficult to achieve, but I still don’t think US unemployment will increase by 1-2 percentage points over the next six to 12 months, says Chen.

The lie also recognizes that there is no way around low growth.

I think there is every reason to expect the economy to weaken more than it has already done. Over the next few months, earnings estimates, which now look relatively optimistic, will likely be lowered. He adds that it is hard to imagine that the financial situation will not get worse until it improves.

– boom era

Chen also noted in Storebrand that the market expects the rise in the key policy rate to be lower and that rate cuts will come earlier than the Fed members themselves estimated in June. The market expects a peak of just under 3.5 percent early next year and then gradual reductions throughout the year.

The Federal Reserve is an analytical environment, which makes estimates and views. The fixed income market represents all market participants. At the same time, we know that the Fed made a huge mistake last year. The Fed believed that inflation was temporary, and it must be said that it is the boom of the times. Based on that, I think the fixed income market isn’t necessarily worse when it comes to analytics, says Chen.

The market’s interpretation of the interest rate may indicate that it thinks the Fed will tighten so hard that the economy suffers significant damage and that interest rates should fall again faster than expected. Doesn’t bode well for stocks in the short term. Therefore, Chen and Storebrand have now made a tactical assessment and moved from overweight to normal weight on global stocks through July.

– The share of the stock decreased with the decrease in value, but we did not return the balance. We don’t dare buy when there are a lot of negative events, says Chen.

He also thinks, like Lee, that earnings estimates seem too high. In this case, there may still be a significant drop in stocks that now look “cheaper” after the price drop this year.

– I think earnings estimates should go down. We focus on the macroeconomics and look a lot at macro audits, and earnings estimates are lagging and looking too high,” says Chen. (Conditions)Copyright Dagens Næringsliv AS and/or our suppliers. We would like you to share our cases using a link that leads directly to our pages. All or part of the Content may not be copied or otherwise used with written permission or as permitted by law. For additional terms look here.