State of the Markets (23 May 2022)

Since my last market state update on 13 May, markets have fallen slightly. S&P is now at 3901 vs 3930. There was a bounce, but it was not sustained, and markets fell back.

Drivers of Market Sentiment

How have the main drivers of market sentiment changed? 2 of the main drivers are stated below:

  • Inflation
    • still remains a strong market-driving force
    • inflation-related economic indicators have remained high
    • Feds remain firm on rate-increase stance
    • War goes on, maintaining upward pressure on selected commodities
  • China slowdown
    • sentiment improved
    • economic data remains poor
    • but re-opening and policy action has given more hope for the future
    • china-related stocks and commodities have relatively outperformed

Overall market sentiment remains negative, though there is some improvement thanks to China news flow.

Trading Outlook

Markets are now low enough for some bulls to view as a buying opportunity, especially when coupled with the improvement in Chinese sentiment. However, inflation-related forces remain a strong downdraft. The likelihood of further market retracements is probably still higher than that for sustained rebounds, though the probabilities are more balanced now.

For me, I find it harder to short the markets. The probability of sudden unexplained rebounds has increased. Trading indices are trickier, due to the more balanced upward/downward forces.

In the commodity space, China re-opening, policy easing and the ongoing Ukraine invasion are supporting prices in spite of current weak data points. Furthermore, commodities are seen as good to hold in times of high inflation. Given the abovementioned support for commodity prices, it will probably be difficult to execute commodity and commodity-related equity shorts.

Investing Outlook

The probability of a successful equity investment has actually increased as prices have fallen. However, the central bank tightening impulse is just starting, so there may be even better opportunities awaiting in the equity space. “Expert” sentiment is starting to deteriorate, with more negative opinion pieces and forecasts coming everyday.

I have no equities at the moment, so I will probably wait for lower prices before starting to buy. There is still a good probability of prices going lower. Central bank tightening has only just started, so it is going to remain a significant downward force for some time.

Bonds are still unfavored due to the increasing interest rates. But sentiment may reverse if inflation expectations come down and/or global economic growth starts to slow down more than anticipated. It is somewhat still a contrarian play to increase exposure in bonds.

However, I still feel that bonds have a relevant role to play in an investment portfolio. Thus I actually have increased bond exposure gradually over the last few months, and fortunately they have been holding up. There are many different types of bonds, we need to be selective and choose the appropriate types for the current financial climate.