Micro perspectives.
Market declines that are preceded by unusually large parabolic price expansion tend to look more benign than a definitional correction because the earlier magnitude takes longer to unwind and, numerically, still looks to be trading in a bullish pattern. For example, while S&P decline is measured at a paltry 6 percent year-to-date, its integer value of 1400 still looks to be “within range” of its all time high set last September. Given decent valuations, it becomes more seductive to investors to think about how far they are from the peak than to contemplate how much further to the bottom.
In terms of relative performance, however, it is far more likely to see the market consolidate downwards than to trek aggressively through previous upside resistance levels.
Earnings growth expectations continue to disappoint in nearly all sectors. While there are certainly individual exceptions within each category, I do not like to think about stock-picking when my purported expertise is really about asset and sector allocation. A far more objective review of the data leads me to conclude that more sectors warrant underweighting in our portfolios versus overweighting. While analysts reconfigure their numbers for the year with each new announcement about inflation-led concerns, I think that equity exposure should be modest relative to overall portfolio growth expectations.
Stocks last week completed an impressive week of capital advancements. While the rebound might look impressive, the bearish pattern begun last October remains quite rigid. I might look to sell into these rallies rather than to buy.
The big picture.
Most global bourses, in fact, have had muted responses to the global inflation scenario. Although somewhat correlated to each regions’ lack/plentitude of natural resources, most commerce has been somewhat immobilized by a steady increase in core wholesale costs and by currency irregularities that drastically impact upon imports/exports.
A majority of central banks are trying to deal with inflation and price-creep. In some instances interest rates are already rising, and in some others, currency is being mass produced to meet that country’s needs. In either case, monetary policy is clearly influenced by supply and demand not only for commodities and natural resources but by nominal demand for necessities and economic viability.
The biggest macro issue today is about an equitable distribution of available commodities (food, metals, water, wood, coal, gas, etc.). Where supplies are weak economies are “poor”. The fine line between abundance and shortage is more precarious today because of regional self-interest and jingoistic monetary implementation.
By definition, normal cyclical timelines are drawn-out longer during these periods of uncertainty. Psychological exuberance and capital flow are in short supply, which prolongs the duration (amplitude) and possibly the magnitude of any correction we might be experiencing. I am not expecting a market crisis, but, rather, a slower negative advance until the details correlate with fundamentals.
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