Juggling Dynamite

Danielle was a guest with Jim Goddard on Talk Digital Network talking about recent developments in the world economy and markets. You can listen to an audio clip of the segment here.

Most financial advisers and managers talk of ‘defensive sectors’ as a place to take shelter in bear markets (because their business model doesn’t want or mandate them to ever leave equities).  Defensive equities and funds work better in theory than in reality because risk assets of all types tend to fall in bear markets.

Case in point, from recent highs, so far the Dow Jones Index is off 13% compared with the S&P 500 -18%, Canadian preferred shares (CPD index) -13%, REITs -16%, Canadian Financials (XFN) -13%, US banks -28%, dividend-paying large-cap companies (XDV) -11%, gold miners (XGD) -25%, Materials (XMA) -15%, Pharmaceuticals -11%, etc. Canada’s TSX is off just -10% because it has been supported to date by its concentration in the late-cycle hold-outs of fossil fuels and financials–this doesn’t last indefinitely.

As shown below, courtesy of Gary Shilling, equities of all stripes tend to lose in bear markets.  Or, as I like to say, different coloured jelly beans are still jelly beans, and they’re all marked down when jelly beans are liquidated.

While bonds have also sold off year-to-date on interest hike fears, at least they have mandated capital return dates and interest payments.  Equities trade on hope with no guarantees.  As the economy slows and monetary policy eases, credit quality matters and the highest-grade government and corporate bonds tend to rebound in price. In contrast, lower-grade debt tends to follow equities lower.  Unlike the unusual v shape rebound from the 2020 lows, it’s also typical for share prices to take years before they recover their prior cycle peaks.   Buy and holders are set for another rough go.

Rates, inflation expectations and contagion from falling markets to housing and the economy–too few connect the dots.  The discussion below does better than most.

David Rosenberg, president, chief economist and strategist at Rosenberg Research, joins BNN Bloomberg to discuss the latest inflation data out of the U.S. Rosenberg shares his very bearish commentary on how sticky inflation will be in the months ahead. He warns about the measures central bankers could take to tackle it, including the possibility of 75bps rate hikes. Here is a direct video link.

As of yesterday, the 27% year-to-date drop in both the tech-heavy Nasdaq and smaller-cap Russell 2000 is the worst start to a year on record.  As shown in the table below, courtesy of Charlie Bilello, the broader-based S&P 500 is -17% from its January 4th high and -16% year-to-date–its second-most negative start to any year since 1932.  As the table shows, prices rebounded into year-end in 7 of the 15 worst annual starts. In eight, they continued to decline.

While 2020 is one of the years where stocks recovered after an initial decline, it’s worth noting that it took zero-interest policy rates, payment deferrals for the masses and trillions of fiscal and monetary support globally.  The US government alone spent a record 43.2% of GDP on stimulus efforts in 2020 and 2021.  In 2022, these extraordinary efforts are all in reverse.

On Monday, the S&P 500 broke below 4000 on the daily close.  As shown below from my partner Cory Venable, a weekly close below 4000 would suggest that 3400 (-15% from here) is next up for restest.

So far, the largest market cap weight and most widely held stock, Apple, is off just 17% from its $185 top on January 3, 2022. When Apple breaks $150 (as noted in Cory’s April 29 chart below), further downside tests await at the $120 and $85 support levels.  Comprising 7% of the S&P 500 market cap, the breakdown in Apple will hit index-tracking funds and portfolios everywhere.

Below is the bear market progress of the thirty most expensive S&P 500 market cap companies so far, courtesy of Bespoke.  Coming down nicely…