How apropos is it that today is Friday the 13th? The S&P is likely to close down 6 weeks in a row, something seen only a handful of times in the past 50 years. There are so many rarely, not seen in a decade, hasn’t happened in 40 years, type events across assets that its clearly a spooky time.
It’s also been a painful time – how painful? Well, I had knee replacement surgery on Monday and my model portfolio performance is hurting me way more than my knee!
Among the most challenging aspects of late has been to try and hold a positive, medium term (1-3yr) view in the midst of very aggressive, downward facing, fast moving, cross asset selloffs. I have pretty strong conviction in my view of a middle path as laid out in last week’s Musings and some like Kevin Muir of Macro Tourist fame have joined that view.
Yet every day, my red splattered screen reminds me that few others see it that way. With the winners now being sold (Apple, energy etc.) I can’t help but wonder if the depths of negative sentiment plumped of late are right – things are not that bad at present – in either economies or earnings and the future path is unknown yet such depressed sentiment speaks to conviction that things are bad and very likely to get worse.
This week’s action reminds me of a hangover as investors were lined up for Wednesday’s inflation print to confirm inflation’s peak. While inflation does seem to have peaked along with expectations and breakevens the data was opaque & far from satisfying resulting in further equity weakness, even while bonds rallied. We are in the handoff from goods demand related inflation to service demand inflation as the post Covid (ex China) reopening takes place. While many worry that service sector inflation will limit inflation’s decline its worth noting that housing is roughly 50% of Services CPI and given that mortgage rates have nearly doubled in the past 6 months housing should cool off.