edited by Michele De Michelisinvestment manager of Frame Asset Management
In May, the American stock market did not give the impression of being on the verge of a correction and in fact the index returned to its highs.
However, I remain surprised by the equity strength shown so far this year, especially considering that the widely expected rate cuts have not materialized.
So why don’t the indices fall, despite the lack of support from the Fed?
Apparently, operators would still seem to be discounting a good situation in the state of the American economy which, despite the high rates, is proving to be more than resilient, also given the profits of the last quarter. A sort of “goldilock economy” albeit in a context of higher inflation. Obviously not everyone thinks the same way, so much so that there are some important managers who argue, however, that the situation is not so rosy and that in the next six months we will see a cooling of the main economic indicators.
In support of this thesis, we can confirm that in the latest conference calls, many managers of listed companies, in an attempt to maintain profit margins, have anticipated cost cuts in the near future which will inevitably be reflected in the labor market. Therefore, it should have a negative impact on the very strength of American consumers that has supported the cycle so significantly, with the consequence of pausing the virtuous circle (strong labor market/high consumption/high profits) that has given wings to the markets equity.
Although some signs are starting to appear, every bad news is interpreted positively because we immediately think of an approach in the Fed’s cuts.
Warren Buffet recently brought the liquidity of his holding company to an all-time record, just at a time when the average liquidity of American managers is at its lowest level. This fact usually occurs historically before corrections.
If we find ourselves on the eve of a downward phase, in all honesty I have no idea, so much so that I continue to have an agnostic attitude towards share prices, limiting myself to observing their strength without forgetting to make use of any protections that are not too expensive.
However, I notice that when American 10-year interest rates exceed 4.6%, even the S&P 500 index begins to get nervous and this confirms to me that the real risk remains inflation.
And since we are talking about inflation, we cannot help but look at the raw materials which have soared in several sectors and could be the third wheel to break the de-correlation between equity and bonds. We’ll see if Warren Buffett was right this time too.
