Wednesday, June 29, 2022

THINK STRATEGICALLY: The 10 Issues Impacting Global Markets

By on June 16, 2022

This week, the market was shocked by the release of the latest Consumer Price Index (CPI), which exceeded estimates. To add insult to injury, U.S. consumer sentiment fell 14.04 percent to 50.2, its lowest level in history. Markets have been highly volatile: The combination of global supply disruptions, high inflation levels, historically high oil prices and the Russian invasion of Ukraine have created a complex scenario. Additionally, the World Bank has already reduced its projection for global gross domestic product growth from 4.1 percent to 2.9 percent, a 29.26 percent reduction, or over $1 trillion less.

The other looming dilemma is a food shortage that may create a dual humanitarian and food crisis in Ukraine and parts of the world. The World Trade Organization warns that, due to the Russian invasion of Ukraine, a food crisis of more than two years could quickly ensue unless safe passage of Ukrainian food products is allowed.

Puerto Rico could suffer such a crisis since the island produces only 15 percent of all it consumes, and we depend on imports for 85 percent of what we consume. Meanwhile, Puerto Rico Agriculture Secretary Ramón González Beiró plans to increase the local production figure to 50 percent, an ambitious but essential goal that must begin with all Puerto Ricans demanding local products. It will take time for Puerto Rico to make these significant changes, which, as I have said, already require a
drastic behavior change.

Although the markets fell almost 5 percent this week due to increased risk against economic growth, I do not believe a recession is inevitable. Market swings sometimes arise from economic outlook pessimism. Here are analytical data for you to make informed decisions based on the best information available.

Ten issues that are impacting the markets, the economy and consumer sentiment: – Inflation remains out of control: The U.S. consumer price index rose to 8.58 percent, much higher than the estimated 8.3 percent.

– World Bank cuts growth forecast: The World Bank reduced its global growth forecast from 4.1 percent to 2.9 percent for 2022 and to 3 percent in 2023-’24. The severe rise in inflation and the rapid pace of monetary policy change have strongly affected growth.

– U.S. recession probability: Likelihood increased for the next 12 months to 30 percent, from 27.5 percent, the highest since 2020.

– More and higher interest rate hikes: The Federal Reserve will further accelerate the interest rate increases beyond 50 basis points; next week, at the Federal Open Market Committee meeting, our forecast is for a rate hike of at least 75 or possibly 100 basis points.

– What the GDPNow says: The Atlanta Fed’s estimate forecasts a GDP of only 0.9 percent, although GDPNow is only a current growth estimate.

– Economic hurricane: JP Morgan Chase CEO Jamie Dimon said he is preparing his bank for an “economic hurricane.” Mr. Dimon, in his usual style, added, “Right now it’s kind of sunny, things are doing fine. Everyone thinks the Fed can handle this. That hurricane is right out there down the road coming our way. We just don’t know if it’s a minor one or Superstorm Sandy. You better brace yourself.”

– Majority of companies earnings surpass expectations: A whopping 77.5 percent of company earnings exceeded estaimates. That strength in corporate profits continues to be integral in reflecting the country’s economy and provides insight into the ability to sway markets.

– U.S. Consumer Sentiment: The index is at 50.2, down from 58.4 last month, a 14.04 percent drop to its lowest level in history.

– Consumer spending continues to rise: Another benchmark that continued its upward trajectory is consumer spending, which rose to 0.42 percent, than estimated.

– Food crisis on the horizon: The World Trade Organization warns that, due to the Russian invasion of Ukraine, a food crisis of more than two years’ duration could quickly occur unless safe passage of Ukrainian food products is allowed.

The Week in Markets: Fear of recession has become a hot topic. Can we avoid it?
We think so.

Last week, the four indices we follow fell hard, the Dow Jones Industrial Average lost 2,506.91 points, for a year-to-date (YTD) return of -13.61 percent; the S&P 500 lost 207.68 points, for a YTD return of -18.16 percent; the Nasdaq composite lost 672.71 points, for a YTD return of -27.52; and the Birling Capital Puerto Rico Stock Index lost 156.22 points, for a YTD return of -7.07 percent.

At current trading levels, the broader markets appear to be pricing in over 65 percent to 70 percent possibility of a recession over the next 12 months. As a counterpoint, the most recent recession survey points at a 30 percent probability of a recession. The right question is: Who is right?
While there are many obstacles, and risks have increased, in my view, the recession is avoidable. Let’s analyze some facts that we like
to call the four pillars of U.S. strength. – U.S. corporate earnings continue to be robust.

– The U.S. has created over 2.4 million new jobs and is on route to creating 6 million this year.

– U.S. Personal Spending has risen to $17.06 trillion.

– The U.S. economy is in a position of strength.

When the Fed takes rates higher to abate the out-of-control inflation, these four pillars will act as a counterweight.
We all need to remember that there is no economic policy or Fed action that can mitigate rising oil and commodity prices; for these reasons, we think the Fed needs to act with a white-glove approach; doing so decreases the chances of a recession.

Wall Street summary for week ended June 10:
Dow Jones closed at 31,392.79, down 2,506.01 points, or 7.4 percent, for a YTD return of -13.61 percent S&P 500 closed at 3,900.86, down 207.68 points, or 5.05 percent, for a YTD return of -18.16 percent
Nasdaq closed at 11,340.02, down 672.71 points, or 5.6 percent, for a YTD return of -27.52 percent Birling Capital Puerto Rico Stock Index closed at 2,675.51, down 156.22 points, or 5.52 percent, for a YTD return
of -7.07 percent . The U.S. 10-year Treasury note closed at 3.15 percent. The U.S. 2-year Treasury note closed at 3.06 percent.

The Final Word: How should investors position their portfolios?

All investors must ensure that their portfolio is well-diversified, with the correct balance of stock, bonds and other instruments that will act as a counterweight during market bottoms. Also, having well-defined financial goals, understanding your risk tolerance levels and time horizon and knowing how your portfolio behaves, will serve you well.

As you make adjustments, it is good to look at high-quality defensive stocks and fixed-income investments.

– In equities, consider U.S. large-cap with a bias towards value sectors, including parts of health care and consumer staples. These may perform relatively well even as the Fed raises rates and yields increase.

– In fixed income, we prefer higherquality investment-grade bonds: A+ or higher.

– Investment-grade bonds offer moreimproved income opportunities today than over the last six months, particularly for investors adding new money to the market.

In conclusion, we see significant opportunities for long-term investors, as their long-term view of the markets will favor them, and this is not the time to be timing the market.

Francisco Rodríguez-Castro is president and CEO of Birling Capital LLC. Think Strategically© is a publication by Birling Capital LLC that summarizes recent and other developments.
This report is intended for general information purposes only and does not represent investment, legal, regulatory, or tax advice. Recipients are cautioned to seek appropriate professional counsel regarding any
of the matters discussed.