Daily Analysis 25 May 2022 (10-Minute Read)

Hello there,

A wonderful Wednesday to you as Asian stocks held steady as traders weigh growth outlook, while U.S. equities continued to bleed on recession concerns.

In brief (TL:DR)

  • U.S. stocks were mostly lower Tuesday with the Dow Jones Industrial Average (+0.15%) up slightly, while S&P 500 (-0.81%) and the Nasdaq Composite (-2.35%) were down.

  • Asian stocks wavered Wednesday as investors assessed a sharp selloff in technology shares and mounting worries that U.S. Federal Reserve tightening will plunge the country into a recession.

  • Benchmark U.S. 10-year Treasury yields gained about one basis point to 2.76% (yields fall when bond prices rise), but are otherwise down from their recent high of above 3%.

  • The dollar gained.

  • Oil rose with July 2022 contracts for WTI Crude Oil (Nymex) (+1.17%) at US$111.05.

  • Gold was lower after rising with August 2022 contracts for Gold (Comex) (-0.38%) at US$1,864.30 against a strengthening dollar.

  • Bitcoin (+2.90%) rose to US$30,097 (at the time of writing) but remains weak and straddling either side of the US$30,000 level, with few catalysts to take it in either direction.


In today's issue...

  1. In a Rout of All Assets there are No Value Plays

  2. Bull or Bear, Time to Pick Some Stock

  3. IMF Official Urges Believers to Keep Calm & Crypto On


Market Overview

Investors are shifting their focus to slowing growth amid tighter monetary conditions to taper surging inflation, the war in Ukraine, and China’s lockdowns that are choking supply chains.

Sales of new U.S. homes fell more than expected in April, and the Richmond Fed’s measure of business activity fell to a two-year low. The Fed minutes from its last meeting out Wednesday may provide some clarity on its thought process and how much investors need to brace themselves for tightening.

Asian markets were higher Wednesday on expectations of Chinese stimulus, with Tokyo's Nikkei 225 (+0.08%), Seoul's Kospi Index (+0.87%), Hong Kong's Hang Seng Index (+0.64%) and Sydney’s ASX 200 (+0.73%) all up in the morning trading session.



1. In a Rout of All Assets there are No Value Plays

  • Retailers at some of America’s most iconic chains, including Target, Walmart and Kohls, have helped to provide some ballast in equity portfolios that had become increasingly overweight on tech.

  • Apparel retailers and big-box chain stores have all been hammered, and even Dollar Tree, a discount retailer, has come off its recent highs.

In the darkness of pandemic lockdowns, the bright lights of Target (-2.57%) and Walmart (+1.25%), considered essential stores, remained opened, shining like a beacon of hope in an otherwise desolate landscape.

And stocks of these big-box stores also rebounded sharply after they were initially hammered by the pandemic in March 2020.

Since then, retailers at some of America’s most iconic chains, including Target, Walmart and Kohls (-5.39%), have helped to provide some ballast in equity portfolios that had become increasingly overweight on tech.

But a broad selloff in all manner of assets against a backdrop of pandemic (China’s zero-Covid lockdowns), pestilence (monkey pox) and plunder (Russia’s invasion of Ukraine), has seen investors take cover in cash, which has spilled over to affect America’s biggest retailers.

Already squeezed by soaring labor costs and compressed margins, shares of American retailers has pushed the SPDR S&P Retail ETF down a whopping 44% from its November high, outpacing the rout during the earliest days of the pandemic.

In May alone, Retail ETF fell 16% or US$484 million, its second-worst month since 2009, according to data compiled by Bloomberg.

Investors are growing increasingly concerned that the confluence of factors have created a perfect storm for retailers, including the rising cost of logistics, labor and goods, costs which may be difficult to pass on to consumers already struggling with inflation in other areas.

Just months ago, policymakers and analysts assured investors that U.S. consumption remained robust, which ought to work out well for retailers, but investors are not biting, and the retail sector is the third-worst performing sector in the S&P 500 this year.

Apparel retailers and big-box chain stores have all been hammered, and even Dollar Tree, a discount retailer, has come off its recent highs.



2. Bull or Bear, Time to Pick Some Stock

  • For the legions of investors looking at their portfolios and wondering whether now is the time to cut losses, try to recall why you entered the position to begin with.

  • Pullbacks are often a good time to do some soul-searching, and with the markets the way they are at the moment, there’s plenty of that going on already.

It’s been said that bears make money, bulls make money, but pigs get slaughtered.

For the legions of investors looking at their portfolios and wondering whether now is the time to cut losses, try to recall why you entered the position to begin with.

Trying to the time the market, to catch the highest highs and the lowest lows is an exercise in futility, far more relevant in investment decision-making is what prices reveal about expectations for the future.

Have markets sufficiently priced in worst-case scenarios to set the stage for a recovery?

Most long-term investors are not technical analysts (those who divine animal spirits from charts), which is why determining if now is a time to pick up some bargains on great companies requires some good old fundamental noodling.

Fundamental analysis is hard work and requires clarity on the economic backdrop, underlying corporate performance and accounting.

While equity bull markets may be driven by narrative and loose monetary conditions, bear market conditions often depend on reasonable valuations and sustainable business models.

For over a decade after the 2008 Financial Crisis, the cost of debt capital was essentially zero, facilitating distortions in asset markets and possibly over allocation into stocks and bonds, while encouraging greater risk tolerance in search of higher yields.

During these heady times, leverage made sense on corporate balance sheets and in alternative investment products, including private credit and private equity.

But as the world’s major central banks start to increase interest rates to combat the effects of inflation, a receding tide will finally reveal who’s been swimming without bathing suits on.

To be sure, it’s not a forgone conclusion that the Fed or any other central bank has the appetite to keep tightening indefinitely –Atlanta Fed’s President Raphael Bostic hinted earlier this week that he would consider a pause of rate hikes in September.

And then there’s how much investors are willing to pay for prospective corporate performance.

Although it may be tempting to return to value approaches to security selection, an entirely new generation of investors, Millennials and Gen Z, are coming to the forefront of markets as well, and the investment decision-making matrix of their forebears holds little sway for them.

Against this backdrop, investors with a bit of spare cash can consider the only free lunch in investing – diversification.

Supercharged tech companies clamoring eye-watering valuations have come back down to earth, but may have room to fall further.

Value stocks have so far failed to deliver on their promise of a safe harbor in difficult times.

As macro uncertainty reaches its zenith, investors may be better off reviewing their portfolios to understand why they look like that to begin with – was it chasing the crowd (FOMO) or was it because of an understanding and a belief in the long-term prospects of that firm?

Pullbacks are often a good time to do some soul-searching, and with the markets the way they are at the moment, there’s plenty of that going on already.



3. IMF Official Urges Believers to Keep Calm & Crypto On

  • Referring to the collapse of the algorithmic stablecoin TerraUSD, Georgieva took to encouraging continued efforts to build value.

  • Nevertheless, Georgieva did stress that it wasn’t helpful to paint all cryptocurrencies with a single brush.

It’s not every day that a top official of the International Monetary Fund (IMF) offers some words of encouragement to the legions of Crypto Bros and “degens” that ply the cryptocurrency space.

But on Monday, speaking at the World Economic Forum’s annual meeting in the exclusive ski resort of Davos, Switzerland, Kristalina Georgieva, the IMF’s Managing Director said,

“I would beg you not to pull out of the importance of this world. It offers us all faster service, much lower costs, and more inclusion, but only if we separate apples from oranges and bananas.”

Referring to the collapse of the algorithmic stablecoin TerraUSD, which took down much of the cryptocurrency industry with it, far from dancing on the grave of the industry, Georgieva took to encouraging continued efforts to build value.

The IMF Managing Director also added that it was the responsibility of regulators from across the globe to put up guardrails and offer education to protect investors.

Georgieva attempted to discern the wheat from the chaff when it comes to cryptocurrencies, noting that different types of assets exist with different associated risks.

“The less there is backing it, the more you should be prepared to take the risk of this thing blowing up in your face.”

Nevertheless, Georgieva did stress that it wasn’t helpful to paint all cryptocurrencies with a single brush.

Regulators and financial institutions may be doing a victory lap given the recent collapse of TerraUSD, an episode which is now attracting the attention of regulators everywhere from South Korea to the U.S. Securities and Exchange Commission.

A police report regarding the collapse of TerraUSD was filed in Singapore, where Terraform Labs has a registered office.

As the fallout of the TerraUSD collapse continues to ripple through the cryptosphere, investors and regulators alike will be studying it closely to determine if this was an isolated incident or inherent systemic weakness in a highly unregulated sector.

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