Stocks fell slightly last week, interrupting the bear market rally that had started in the second half of May.
We hold a risk-on portfolio at the moment because:
1. The market has already incorporated an economic slowdown into prices.
2. The $SPX500 is trading clearly below its 50-day moving average.
3. Investor sentiment is pessimistic and positioning low.
4. The media narrative appears negative, with more focus on the possible downside than upside.
5. Investor flows into equities have reversed, with large inflows seen last week.
6. China is re-opening its economy.
This positive tactical outlook does not change our view that sooner or later, the Fed will have to raise interest rates aggressively to bring inflation back under control, which we expect will lead to further losses for stocks in late 2022 or 2023.
But this may not be a straightforward or quick process. As Ruchir Sharma notes in the FT: “Markets do not move in straight lines, and it takes time for entrenched investor psychology to break. Though many institutional investors have cut stock holdings, retail investors have barely flinched so far.”
Many still remember the good days of 2020 and 2021 and hold onto their stocks. It may take more economic pain and market losses for investors to give up on stocks, which would then create the right conditions for the next bull market to start, perhaps sometime in 2023.
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$BAYN.DE (Bayer AG) and $EQR (Equity Residential) were replaced by $ADS.DE (Adidas AG) and $KER.PA (Kering SA), in part because the latter two benefit from China’s re-opening.