Our view is that intensifying near-term macro headwinds will likely create opportunities for emerging tailwinds later this year. 

While headwind inflation is not rolling over and there are no signs that the Fed (U.S. Federal Reserve) will become less aggressive, we expect this to change in the coming months ahead as economic data worsens and inflation falls, leading to the Fed moderating their rate tightening relative to expectations.

The impact of the Fed’s actions are only starting to be felt.  Initial jobless claims have begun to pick up.  New home sales have rolled over sharply and just saw their worst month-over-month decline in nine years.  Mortgage applications have tanked as well.  Global Purchasing Managers Index (PMI) are showing deceleration and regional manufacturing reports, such as Euro zone, have started to decline.¹

Inflation, while potentially peaking, remains elevated and in the next 12 weeks, we expect to see another 125bps of tightening and Quantitative Tightening (QT) just started at the beginning of June whereby the Fed is shrinking its balance sheet by US$95B/month.  So while we’ve seen a lot of multiple compression appropriate for a higher rate environment, it seems premature to say the bottom for stocks is in.  We are likely to still see negative estimate revisions in the upcoming months.

The stats could start to align towards the end of the summer and is likely where we get more constructive – albeit from lower levels.  By that time, earnings estimates are likely to be far better calibrated, the economic data may have softened enough for the Fed to hopefully back off on its rate march, headline inflation will likely be less shocking as base effects becomes more difficult to accurately access inflation level over time, and if you pay attention to the four-year Presidential cycle, since 1950, after posting severely negative returns in Q2 in the second year of the Presidential cycle, the largest returns are generally seen in Q4 and Q1 of the following year.  Layer on the fact that by that time, the tide may have turned in the Russia/Ukraine conflict and zero COVID may be a thing of the past in China.   

Within the portfolios, we are adding to stock-specific, positive-change companies with quality growth attributes.
 

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