- Equity markets rallied sharply last week, as a softer-than-expected U.S. CPI report was just what the market needed.
- The S&P 500 jumped 5.9%, while the Nasdaq surged 8.1%.
- Despite plenty of noise elsewhere—see the midterm election and an imploding crypto market—inflation was the key for equities.
Last week, we saw unsettling news about a major cryptocurrency exchange filing for bankruptcy protection. The company—FTX—paused withdrawals from clients’ accounts and sought a rescue package from one of their main rivals. After the potential bailout was abandoned, contagion eventually spilled into traditional equity markets. Some investors stood to lose substantial amounts of money—and that affected risk appetites across the board. On a positive note, equity market declines were limited to under 3% that day, as traditional finance’s exposure to crypto remains relatively small and prices had already fallen earlier in the year due to other organizational failures. Moving forward, institutional investors will likely be more cautious about entering the space. Even in broad equity markets, where the risks are well known, investors were blindsided this year by Russia’s invasion of Ukraine and the de-listings in China. As an unregulated market, crypto adds yet another layer of unpredictable risk. Case in point: after the FTX news came to light, not only did the CEO resign and the company enter bankruptcy proceedings, but 130 other crypto firms associated with the exchange also filed for Chapter 11 protection in the U.S., showing there will likely continue to be knock-on effects across the industry.
Bottom Line: The recent collapse of a crypto exchange highlights, once again, the importance of clear regulation.
With crude prices dropping for several consecutive days, markets are somewhat concerned about softening consumer demand. We are not—our confidence on being overweight to Energy remains high at this point. Remember, energy producers had already moved up a fair amount by the time the declines began. And although we did sell some covered calls on our energy position, the move was not intended to reduce our exposure. Rather, we wanted to generate premium income from short-dated options contracts that were attractively priced. We still believe demand will be strong. We continue to think China will increase consumption as the country opens up and now that we see them softening their COVID stance this will further help push prices higher. And we remain skeptical about supply coming off in the near future. From our vantage, the overall picture points to stronger fundamentals for energy, particularly as better-than-expected inflation numbers start to reduce the possibility of a hard landing.
Bottom Line: Despite momentary dips in crude oil prices, we remain bullish on Energy markets.
Last week’s CPI report showed that inflation dropped more than expected, which came as positive news for investors. The market needed hope again. For weeks, the U.S. Federal Reserve has provided negative information about the need for rates to go higher than expected, and for longer. But with improving inflation data came a market rally. On closer inspection, the report does show that some parts of inflation—such as grain—spiked again after one month’s decline. Nonetheless, everyone believes that topline inflation has peaked and will continue to come down in the months ahead. Our only caution is that 7% is nowhere close to the Fed’s 2% target. The momentum of rate hikes could certainly slow if the Fed decides to scale back to 50 or 25 basis-point increases. However, regardless of their path, we will likely see several more rate hikes before reaching a terminal rate of around 5%. We think the market is still overrating too much to this one print.
Bottom Line: We strongly believe the current rally is due to the market rooting for upside, and as such, may be short-lived.
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