Market Crash: More Turbulence Ahead! This could just be the beginning of a market upheaval
The US Treasury yield curve has collapsed close to inversion – a situation in which short-term interest rates exceed those at longer maturities, which has often preceded a downturn. In Europe, energy costs have risen to unprecedented levels as sanctions on Russia deepen a global commodity crisis.
“Over time, the top three factors that tend to push the US economy into recession are an inverted yield curve, some kind of commodity price shock, or Fed tightening,” said Ed Clissold, chief US strategist at Ned Davis Research. “Right now, there seems to be potential for all three to happen at the same time.”
Food prices have already exceeded levels that have contributed to past uprisings and the outbreak of war between Russia and Ukraine — which together account for 28% of global wheat exports and 16% of corn, according to UBS Global Wealth Management — only increases risks .
In the meantime, the Fed is unlikely to step in to stave off sell-offs, according to George Saravelos, global head of currency research at Deutsche Bank. That’s because the root cause of the current surge in inflation is a supply shock, which has rendered the playbook that has been used to combat downturns for the last 30 years all but useless.
The probability of a US recession next year may be as high as 35%, according to economists at Goldman Sachs Group Inc., who have lowered the bank’s growth forecasts due to rising oil prices and the aftermath of the war in Ukraine. The Bank of America Corp. said the risk of an economic downturn is low for now but higher next year.
With a sharp and widespread economic slowdown on the horizon, here’s a guide to preparing based on interviews and notes from fund managers and strategists.
While the year started with bullish bets on European stocks, that is now history. Record inflation, a surprisingly hawkish move by the European Central Bank and Vladimir Putin’s attack on Ukraine have changed everything, and a mass exodus from the region’s equities is well underway.
Strategists from all asset classes see the old continent as most exposed to the risks of war, not least because of its geographical proximity and energy dependence on Russia.
“There is a high probability of a recession for the eurozone if the situation does not normalize quickly,” said Christophe Barraud, chief economist at Market Securities LLP in Paris. Risks include the confidence shock from the war, the hit to household consumption from higher food and energy prices and the increased supply chain disruptions caused by the conflict, he said.
Even enthusiastic bulls like UBS Global Wealth Management have downgraded eurozone stocks. Amundi SA, Europe’s largest wealth manager, said on Friday that a temporary economic and earnings recession was now a possibility on the continent.
The silver lining is that much of the bad news for Europe can already be factored in and reveal opportunities. The strategists at Bank of America Corp. cyclical vs. defensive stocks in the region lifted, as did automakers.
“Recent underperformance makes them more realistically valued,” they said.
raw material oases
Miners and energy are the only sectors that have weathered the slide in European equities so far, and will likely continue to do so unless price increases destroy demand in the process.
“The energy sector in stocks is one of the areas that offer protection,” Nannette Hechler-Fayd’herbe, global head of business and research at Credit Suisse Group AG, told Bloomberg TV. “In the best case, growth picks up and the energy is supported by it. In the worst case, prices will continue to rise and the energy sector will also continue to be supported.”
In the emerging landscape, the UK has been touted as a potential haven due to an abundance of resource stocks in the FTSE 100 index. While the MSCI benchmark for global equities has fallen 11% this year, the UK large-cap gauge is down just 3%.
Energy and materials companies, along with the traditionally defensive sectors of healthcare and utilities, together account for 58% of the FTSE 100 – index members such as Shell Plc and Glencore Plc have risen on fears of a tightening of supply. MSCI’s global benchmark drops that number to about 31%.
Opaque industries like agrochemicals are also doing well, and continued tightness in fertilizer markets due to the war in Ukraine could be a problem for companies like Yara International ASA, OCI NV, Mosaic Co. and Nutrien Ltd. good promise.
U.S. staple foods and retail have also outperformed during periods of stagflation in the past, UBS strategists Nicolas Le Roux and Bhanu Baweja write in a statement.
alcohol and chocolate
Of course, not all yield curve inversions, tightening cycles and commodity spikes result in economic contractions. But the risks are there, and investors looking to hedge should act — even if it may be too late.
According to CFRA data dating back to World War II, the US market expects a recession to start an average of seven months and bottom an average of five months before a recession ends.
Until the National Bureau of Economic Research tells us we’re in a recession, “it’s time to buy,” said Sam Stovall, chief investment strategist at CFRA.
And if the market uncertainty makes you unsure what to buy, Greenmantle’s Dimitris Valatsas recommends a house.
“The historical evidence from the last global inflationary period in the 1970s is clear,” he said. “In real terms, housing construction is outperforming every other major asset class, including equities, in all major economies.”
But to gain a foothold in the stock markets, it pays to invest in convenience and essential technology providers like Microsoft Corp. to keep in mind.
When the crisis hits, “consumers typically look for little pleasures,” said Edmund Shing, chief investment officer at BNP Paribas Wealth Management. “Buying new cars or smartphones suffers, while liquor and chocolate tend to benefit.”