“Overall the sentiment has turned very positive on last Monday’s Key reversal as expected” –Paul Ebeling
Last week’s Wall of Worry
The us benchmark indexes reversed and made a comeback last week after being sideways for most of the past few months.
The financial troubles of a large Chinese property developer added another brick to the wall of worry, which includes growth slowdown concerns, inflation pressures, a dial down of the Fed and ECB stimulus, and the debt ceiling.
This growing number of uncertainties resulted in the biggest daily S&P 500 loss since May, before stocks rebounded as the wk progressed.
We see the brief stock-market pull back as a temporary and not unexpected move within the confines of this Bull market.
Evergrande’s debt woes unsettled global markets, but contagion risk is very limited. The fact that Chinese equities did not reach a new 52-wk low last wk, and that the emerging-market benchmark kept pace with the S&P 500 despite the headlines, is a sign that a lot of bad news is possibly priced in, and that a PBoC policy stimulus is expected.
We believe that stocks will continue their upward climb over the next few years, supported by positive economic and corporate fundamentals. Last wk’s market indicators are also consistent with the view that this Bull market is intact.
Companies and sectors that are more sensitive to the economic cycle rallied, with financials and energy leading the S&P 500. Consistent with the theme of cyclicality, small-caps and value-style investments outperformed.
S&P 500 profit margins hit a record in Q-2 as revenue rose at a much faster pace than costs on the back of strong economic growth. The Q-3 earnings season is fast approaching and could bring some profitability challenges due to a combination of slower revenue growth and input-cost pressures from supply and labor shortages. As it becomes more difficult for companies to pass the increased costs to consumers, earnings growth could slow, also suggested by the recent peak in the ISM manufacturing Purchasing Managers’ Index. These pressures will likely prove temporary as supply-chain disruptions ease in the coming quarters, but they could still trigger some volatility along the way.
Stocks continue to look attractive relative to other alternatives. As long as fundamentals are positive and there is healthy skepticism, stocks will likely continue to climb the wall of worry.
Bottom Line: The S&P 500 is less than 2% off its record high and was down 5% at its worst on last Monday. This difference between performance of major indexes and the average stock is even more pronounced in small-cap stocks, which have been correcting for months now as growth rates peaked, suggesting that investors have not been ignoring the growing headwinds. For investors and professional money managers, this dynamic could present opportunities to further diversify portfolios, adding quality stocks at potentially discounted valuations.
Have a prosperous week, Keep the Faith!