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Written by: Todd Asset Management
War, recession, inflation, stagflation, covid lockdowns…. These are just some of the concerns Wall Street strategists seem obsessed with when we turn on the financial news, and it sounds like they hate everything. Fixed Income investors just saw the worst drawdown in a generation, and rates look like they want to move higher. Stocks are dealing with recession fears and still need to decipher what a nearly inverted yield curve in the U.S., war in Ukraine and covid lockdowns in Asia mean for the future. We’ve found that when strategists are highlighting what can go wrong, the best course of action is usually to ask, “What could go right?” Whenever situations (and sentiments) become obvious enough to hate everything, it is almost always reflected in current prices.
Inflation concerns are heightened as re-opening demand remains strong globally. Meanwhile, commodity prices have spiked because of Russia’s war on Ukraine and supply chains are dealing with renewed covid-related lockdowns in Asia. There is cause for some optimism here, as measures related to the supply chain disruption are showing those strains easing. For instance, the number of ships anchored and waiting to unload at the Long Beach and Los Angeles ports have declined from over 80 to almost zero. Supply chain concerns should ease as the year progresses, taking some of the upward pressure off prices. Any progress in finding a resolution to the war in Ukraine would likely take upward pressure off energy prices too. Will it happen? Nobody knows, but very few analysts are predicting it now, and it could occur.
Listening to the market’s message is very helpful when this type of bearishness prevails. So, what is the market telling us now? First, the traditional recession beneficiaries are not the leadership groups in international markets since the invasion of Ukraine. Healthcare, Materials, Industrial and Financials have led since February 24. Three out of four of those are economically sensitive. Considering that leadership profile along with yield curves in Europe and Asia being much steeper than the U.S. curve, the market does not seem to be anticipating recession overseas. Can this change? Of course, but we are not seeing signs of that change right now. We are watching the situation closely.
Another message from recent markets is that value stocks have outperformed growth stocks this year, both in the U.S. and overseas — by a lot. Higher rates are leading to multiple compressions in many of the highly valued growth stocks. Also, the higher rates (i.e., German 10-year rates have gone from -20 basis points to +61 basis points since year end) are usually signs that investors believe the economy should continue expanding. As investors regain comfort due to either becoming desensitized or some resolution to multiple concerns (war, covid or economic worries) our belief is that the value trade continues to work. As investors become more comfortable, we believe international markets should regain their lead on U.S. markets as well and investors feel secure enough to venture in and benefit from their value and potential yield advantages over the U.S.