Trademark Financial Market Update – August 29, 2022
1) The big news today was always going to be the market reaction to Fed Chairman Powell’s Jackson Hole Speech. Powell wasn’t trying to move the stock market (even though he knew he would), but the market had run hard on the idea that he was close to moving back to a neutral stance on interest rates. He firmly disabused stock investors of this notion today. Theoretically investors can fight the Fed (if they believe the Fed is in a corner and has to pivot), but this is dangerous because the Fed has a lot of tools at its disposal. The summer rally was an attempt to front-run a Fed pivot from hawkish to neutral, and if today is any indication it will fail miserably.
2) I believe China’s upcoming National Congress is something far more significant to the world than what the Fed said today. This is expected to take place this November, though the exact date has not been confirmed. Xi Jinping is attempting to become, effectively, president for life. Power in the hands of one person is not generally investor-friendly, especially not a person with little love for messy, diffuse, unpredictable nature of free markets. Expect Chinese markets to trade as a proxy on Ji’s prospects, with market weakness a sign of Xi being more likely to consolidate all power. If Xi ultimately does not prevail, expect an explosive move to the upside – in China certainly but also to a lesser degree in other emerging markets.
3) From Wisdom Tree, a breakdown of the investable world:
- 61% United States
- 28% Developed EAFE (16% Europe, 6% Japan, 3% Canada, 3% Australia & NZ)
- 11% Emerging Markets (3% Taiwan+S. Korea; 4% China w/Singapore & HK; 2.6% So. Asia, 1.4% Africa & Middle East)
This is what Vanguard’s index and target date funds reflect. It has been fairly easy over the past 12 years to outperform global benchmarks by overweighting the United States. Though the benchmark calls for 39% of equity holding to be outside the U.S., we have almost always been between 24% and 30% over the past decade. We are around 26% today, but with absolutely everything going wrong for foreign markets lately the potential upside to a lessening of global strife in terms of lower inflation, cheaper energy, and a weaker dollar could be enormous.
4) Energy had a very good week on news of a larger-than-expected drawdown in national oil reserves. Regard this as a volatile series; the next weekly report could easily show more reserves than forecast. It is true that we have under-invested in energy over the 2016-2021 time period, but we are making up for that now and oil is being hoarded in some areas. We might well see prices fall as a temporary glut is resolved before the primary trend continues higher. Today is not the time to buy.
5) One of the big reasons for the 1H22 market decline was the expectation that corporate profit margins would fall due to rising labor and materials costs. If the results from the most recent earnings season are any indication, however, companies are fairly easily passing those costs on. This may be bad for consumers and bond investors (persistent higher inflation), but its good news for stock prices. This has been a catalyst for US stocks since earning season began around July 18th. Earnings season is almost over now, so this tailwind has less impact now versus the strong headwind of a resolute Fed.
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