Five reasons for caution after Wall Street’s best July in 83 years – Michmutters

Five reasons for caution after Wall Street’s best July in 83 years

But there are reasons to remain cautious, or at least watchful.

  1. The Fed still has plenty of work to do on inflation. The market sees US rates getting to about 3 per cent and then falling as the central bank tries to support a weakening economy. But if inflation remains sticky – which it clearly has for 18 months – then the Fed may need to go much harder. And remember, stronger equity and bond markets represent a loosening of financial conditions, which ironically may force the Fed to take higher rates to cool things down. Friday’s employment cost index in the US rose 5.1 per cent in the June quarter. The Fed will want to be sure the labor market is cooling before it can breathe easier on inflation.
  2. Earnings were less worse than feared but were still not amazing. Apple’s much-hyped results saw it deliver revenue growth of 2 per cent in an environment of surging global inflation. Further, profit margins are still close to all-time highs despite the factors that have increased them in the last decade – falling rates, cheap offshore labor, falling tax rates, uncomplicated supply chains – all reversing.
  3. Stocks remain relatively expensive. Wall Street’s forward price to earnings multiple of about 16 times is obviously down from 21.4 times in January, but remains higher than it was in 2007, before the global financial crisis started.
  4. Dead cat bounces happen frequently in real bear markets. From March 2000 to April 2002, the Nasdaq lost 78 per cent. But during that time stocks rallied more than 10 per cent on 11 occasions, with one rally adding 45 per cent across 15 weeks.
  5. The world remains susceptible to shocks. The war in Ukraine means energy markets remain fragile. Housing bubbles in the US, UK, Canada, Australia, New Zealand, Sweden, Germany are deflating in potentially unpredictable ways. How China navigates its COVID-19 mess will have consequences for inflation and supply chains.

Leave a Reply

Your email address will not be published. Required fields are marked *