This commentary was issued recently by money managers, research firms, and market newsletter writers and has been edited by Barron’s.
Small Business in Distress
May 11: The US NFIB Small Business Optimism Index was unchanged in April, remaining at 93.2. Small-business owners’ sentiment has been deteriorating since mid-2021, with rising inflation being reported as the top concern. The six-month outlook fell to an all-time low.
Although the net share of businesses reporting price increases decreased slightly in April, it remains elevated, with 70% of passing on higher costs to their customers. A smaller-yet-still-elevated 47% of are planning to hike prices further. Finding workers continues to be a struggle for small-business owners. Among those hiring, 93% reported few or no qualified applicants for the positions they were trying to fill.
Lower inflation will go a long way toward improving small-business owners’ sentiment. We expect this to happen in the back half of the year as the pandemic abates—allowing consumption to pivot from durable goods back to services—and supply-chain disruptions to ease. With inflation lower, the need for the Fed to generate hawkish surprises will temporarily subside, putting downward pressure on the dollar. Easing pandemic headwinds will also allow low-skilled workers to return to the labor force and economic growth to revive. Small-cap stocks typically outperform their large-cap peers when economic growth is accelerating and the US dollar is weakening. Small-caps are also attractive on a relative valuation basis.
Murky Outlook for Housing
US Economic Outlook
May 12: The housing market remains hot, with the inventory of houses available for sale dropping to a four-decade low and prices continuing to increase. Resilient demand will continue to provide support to the market, but the strength is unlikely to sustain. Higher mortgage rates and home values are eroding affordability, which will weigh on sales in the coming months. These factors are likely to take some steam out of price and rent increases, both influential to inflation.
Carl R. Tannenbaum, Ryan James Boyle, and Vaibhav Tandon
Is Maximum Pessimism Near?
The Per Stirling Capital Outlook
Per Stirling Capital Management
May 11: According to the Stock Trader’s Almanac, the 23 “corrections” (ie, declines of between 10% and 20%) that the S&P 500 has endured since 1945 have averaged 14%, which happens to be the scope of the current decline, and lasted , on average, for four months, which happens to be the duration of the current decline.
While not necessarily predictive, it adds some perspective to the current correction. In addition to improving valuations, the scope and breadth of the decline are flushing out speculative excesses like leverage and investor euphoria and sending some readings of investor sentiment, such as the American Association of Individual Investors (AAII) Bull/Bear Survey, to some of the least bullish readings in history. Markets normally bottom at or near the point of maximum pessimism.
BOJ Stuck in Neverland
May 11: “I trust that many of you are familiar with the story of Peter Pan, in which it says, ‘The moment you doubt whether you can fly, you cease forever to be able to do it,'” said Bank of Japan governor Haruhiko Kuroda in 2015. Fast forward to 2022, and Kuroda now finds himself with nothing left in his monetary policy toolkit but wishful thinking. And he still can’t fly.
The BOJ has been hoping to revive Japan’s economy since it first set negative short-term rates during 2016. It has been experimenting with yield-curve control since September 2016, buying up as many 10-year Japanese government bonds as necessary to hold longer- term rates near 0%.
Now, with rates still near negative, a balance sheet of over $5 trillion, and inflation just beginning to show possible signs of reaching the bank’s 2% target while the global economy is on the brink, the bank doesn’t have much left it can do to stimulate domestic animal spirits. Kuroda and his associates may very well be grounded in negative-interest-rate-land for the foreseeable future. While the Federal Reserve and European Central Bank are moving toward monetary tightening, the BOJ likely will remain an outlier with its continued easy stance. The policy focus in Japan is likely to turn to fiscal stimulus.
Deep Dive Into Defense
Macro Markets Strategy Industry Report
May 9: Although China’s military expenditures are significantly lower than those of the US, China benefits from being a late adopter. China has routinely adopted the best and most effective platforms found in foreign militaries through direct purchase, or retrofits. Consequently, China has been able to focus on expediting its military modernization at a percentage of the cost.
In response to China’s military growth and perceived threats by it or any other adversary, the US continues to invest heavily in research and development as well as long-term defense projects like the fifth-generation F-35 Joint Strike Fighter and B-21 Long -Range Strike Bomber. Furthermore, countries like Germany and France, whose defense budgets shrunk since the Cold War, are reassessing and pledging to increase their military spending as the result of Russia’s unprovoked attack on Ukraine.
As the theater of military operations transitions from the Middle East to the Far East, the military equipment used will change to fighter aircraft, space resilience, shipbuilding, and cybersecurity. Defense contractors are likely to experience demand for high-end military equipment, especially unmanned military fighter aircraft, cyber and intelligence solutions, and hypersonic weapons (missiles and projectiles).
The defense sector should expect growth stemming from governments modernizing and reinforcing their defense capabilities.
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Credit: www.marketwatch.com /