Connect with us

Property & Finance

What does the summer have in store for markets?

Published

on

By Michael O’Connor

Markets in May

US equities ended in May on a modest note as inflation concerns dominated the headlines. The S&P 500 secured its fourth consecutive month of positive returns with a gain of 0.6%.

Value-oriented strategies led the way with both Growth and Momentum, last year's big winners, declining. Most factors posted positive gains, with financial and industrial leading the way as expected. Surprising to many, the Tech sector has now underperformed the S&P 500 Index for the past year.

Confidence continued to grow as economies reopened. Jobless claims in the US have fallen to a new pandemic low. Travel continues to rebound, with 1.9 million US travellers taking to the skies on Saturday, May 29, marking the busiest weekend of air travel since the pandemic began. Most importantly, successful vaccine rollouts continued in May, with the UK recording its first day of zero daily COVID deaths since the pandemic began.

What lies ahead

Despite multiple reasons for economic optimism, the expected inflation that comes with a global reopening is likely to result in some short-term market fragility over the coming months.

The most recent inflation figures saw YOY consumer prices increase 4.2% in April, the biggest 12-month increase since September 2008, the height of the financial crisis. Core PCE climbed to an annual figure of 3.1% in April, far exceeding the Fed's nominal target of 2%.

Inflation is likely to continue this run higher over the coming months. Rising commodity prices, a falling dollar, and wage growth resulting from severe labour shortages are likely to result in inflation figures of between 3% to 4% over the summer.

While short-term inflation moves suggest a continuation of the rotation into value stocks, it's important to note that the current inflationary environment is unlikely to persist over the longer term. The combination of transient inflation drivers and long-term deflationary factors should see inflation fall back to around 2.5% later this year.

So what does this mean for your portfolio?

Now is an opportune time to recalibrate your portfolios to avoid obvious interest rate risks. In my view it is a time to be underweight with long-duration assets, whether they be 20 Year Treasuries or disruptive tech stocks with no free-cash-flow. High volatility and small-caps and lower quality names should be avoided. Companies with superior cash-flow generation will continue to anchor portfolios as the current gusts of inflation takes hold.

I remain positive towards equities, with a bias to cyclical stocks and "value" names as earnings remain solid and monetary stimulus remains supportive.

With all that said, don't blindly presume that all stocks set to benefit from an economic reopening will be guaranteed "value" winners. Strong free-cash-flow is the focal point here.

Take booking.com as an example. At first glance, nations full of holiday-deprived travel enthusiasts would suggest that the near-term future is bright for the travel conglomerate. However, the market already appears to have jumped the gun on this one. 'Booking's' current valuation is now above its pre-pandemic levels despite the company's 2021 revenue projections being roughly half the revenue earned in 2019. Now I'm not saying that booking.com is a bad long-term investment, but as a forward-looking machine, the stock market has already priced in much of the expected near-term optimism, and then some, for these better-known reopening stocks.

Search for strong free-cash-flow, not just a compelling storyline.

For more investment insights, visit www.theislandinvestor.com.

Continue Reading
Advertisement

News

2023 Market Predictions

By Michael O’Connor, theislandinvestor.com For me, investing is just a potent mix of optimism and paranoia – being optimistic about what the future holds but constantly paranoid about the landmines […]

Published

on

0245212_Mike_Stocks.jpg

By Michael O’Connor, theislandinvestor.com

For me, investing is just a potent mix of optimism and paranoia – being optimistic about what the future holds but constantly paranoid about the landmines that you will undoubtedly trigger along the way.

Finding a balance between the two is key, but I have to admit, going into 2023, paranoia appears to have the upper hand.

Expectation vs Reality

Whether you are waiting on test results, or tentatively hovering over the phone for that all important call back from your potential new employer, it’s the difference between expectation and reality that dictates the severity of your reaction.

Regardless of how bad the reality turns out to be, if your initial expectations were set apocalyptically low, your reaction will probably be positive and vice versa.

Financial markets work the same way. As I have said before, investing is never about things being objectively good or bad. The narrative is always based around better or worse. If the outlook for markets is exceptionally high and the performance falls even slightly below these expectations, prices will fall as a result. The fact that performance and growth is still strong in absolute terms is irrelevant if expectation were not met. With this in mind, in order to understand how markets will react in 2023, we must first analyse the market’s expectations.

The Year Ahead

On the equity side, 12-month forward earnings projections for the S&P 500 are set at 5%. In other words, analysts predict American companies will grow their profits by 5% next year.

While this represents a significant slowdown in growth relative to what we have experienced since the pandemic pullback in early 2020, I view this as optimistic, given the considerable change in monetary and fiscal policy in 2022.

Q3 2022 earnings season looks likely to finish at 2% year-over-year growth, the weakest since the height of the pandemic. Ex-energy, performance becomes weaker still.

Looking ahead to Q4 2022, analysts are now predicting the first negative quarter since 2020, with profit growth falling to -2%. These Q4 earnings predications from the same analysts were as high as +9% as recently as June.

While expectations for ‘23 are still at plus 5% earnings growth, I wouldn’t be surprised to see 2023 earnings forecasts suffer the same faith as the Q4 2022 forecast.

In short, markets are a bit like the Irish weather, never believe the forecast.

As leading indicators continue to point towards a slowdown in economic activity, a base case of positive 2023 earnings growth becomes difficult to justify. In my view, this will result in some negative earnings surprises in the second half of 2023.

In Fixed Income markets, the Fed has reiterated its plan to hold rates higher for longer, and this expectation is reflected in markets. According to the market-implied Fed Funds Rate, investors are now expecting US short term interest rates to peak at 4.9% in six months and remain well above 4% into 2024.

In my view, the probability of the Fed maintaining a long pause as we enter more economically uncertain times is not as high as the market is predicting. I believe a pivot is likely before 2024 as earnings and labour markets weaken.

Summary

While the lows for multiples may already be in, a mild earnings recession in the second half of 2023 may result in a slow grind lower for the stock market.

This pullback in earnings and labour will prompt a pivot from the Fed, forcing them to cut rates in an attempt to avoid the re-emergence of the disinflationary forces that provoked a decade of QE through the 2010s.

While it is impossible to know the exogenous shocks that lie ahead, buying up short-term Treasuries and maintaining a tilt toward value-based equity will protect if the current economic slowdown persists.

For more tips on how to beat the market in 2023, simply go to www.theislandinvestor.com.

Attachments

Continue Reading

News

How to prevent oil escaping

By John Healy of Healy Insurances These tips will help you to prevent the loss of oil around your household. Plastic oil tanks should be regularly checked and replaced immediately […]

Published

on

0245079_shutterstock1768615634.jpg

By John Healy of Healy Insurances

These tips will help you to prevent the loss of oil around your household.

Plastic oil tanks should be regularly checked and replaced immediately when any defects are identified.

This is especially important after periods of extreme hot or cold weather as tanks that are outside and exposed to the elements may have been damaged.

Regardless of the oil tank’s age, you should check your tank at least twice a year for signs of cracking and/or failure. This damage is often a result of weathering or poor installation.

If an oil tank is installed without full horizontal support, it can cause the tank to become warped over time and eventually lead to cracks and leakage. If in doubt refer to the manufacturer’s installation instructions.

In the event that defects are discovered, the tank should be immediately replaced to prevent any further oil from escaping. If an escape of oil occurs it may cause damage to the environment, which can result in your property being uninhabitable, and you may require temporary accommodation.

An oil tank should be refilled before it runs completely empty. This is because they accumulate grit over time. Refilling the tank early causes the grit to become diluted, meaning that it won’t create low grade fuel which will cause damage to your home’s supply piping.

Oil levels can be monitored easily by simply using a long stick.

More advanced methods of calculating how much oil is left in a fuel tank such as a Watchman System will not only tell you how much oil remains in the tank itself, but will signal you with an alarm when it is time for you to refill it.

When purchasing oil, always be sure to do so from a reputable and trustworthy source as this will ensure that you are getting quality fuel. Fuel purchased from unlicensed sources may be of very poor quality, and not necessarily be what it is labelled as, so could potentially do more harm than good to your piping and fuel supply system.

Continue Reading

Trending