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This commentary was issued recently by money managers, research firms, and market newsletter writers and has been edited by Barron’s.
Diversify Beyond the Dollar
UBS House View – Daily U.S.
UBS Investments
April 14: USDSGD [U.S. dollar to Singapore dollar exchange rate] eased slightly on Friday after Singapore’s central bank unexpectedly held its monetary policy steady, ending a run of five straight moves to tighten. The Monetary Authority of Singapore, or MAS, statement points to rising risks in the global economy and Singapore, including a “below-trend pace of growth” at home. The MAS joined central bank peers in Canada, Australia, India, and South Korea in electing to pause their inflation fights as growth risks mount.
Our view: It isn’t a surprise to see other central banks hitting the brakes as the Federal Reserve itself approaches the end of its rate-hike cycle and macro headwinds rise. We believe the period of broad U.S. dollar outperformance is at an end, and see several strategies that investors can consider to reduce their exposure.
First, non-USD investors should strengthen their home bias with a currency hedge or asset shift, reducing USD holdings across assets. Second, investors should consider increasing exposure to select Group of 10 currencies, such as the Australian dollar or the Japanese yen. Third, we see opportunities for adding gold, which has further room to appreciate, in our view. And finally, consider exposure to a basket of emerging market currencies to capture expected emerging market strength and high nominal-interest-rate carry.
Mark Haefele and team
Delinquency Rates Rising
Capital Markets Outlook
Putnam Investments
April 13: It is troubling that delinquency rates for a whole host of consumer loan types, although still low in absolute terms, have turned up steadily since mid–2022. Delinquencies for auto loans are almost back to their prepandemic levels. Delinquency rates for credit cards held by younger borrowers—those in their 20s to 40s— are now well above their prepandemic levels. None of this behavior strikes us as indicative of a household sector flush with cash and certain about their employment prospects.
Jason R. Vaillancourt
Mixed Food-Inflation Trends
AM Charts
BMO Capital Markets
April 13: One of the biggest surprises in the March consumer price index report was the first decline in grocery-store prices since 2020. This chopped the year-over-year rate down to 8.4% after a steady diet of double-digit gains in the past year.
And, lower food costs at the producer level flag some further progress. For such a weighty item in both the CPI (about 9%) and inflation expectations, the reversal will go some ways to helping the Fed restore price stability.
But only part way. Restaurant prices, which account for about 5% of the CPI, are still running at an 8.8% year-over-year clip and are driven more by labor costs. They, like other services prices, will be a tougher nut for the Fed to crack.
Sal Gautieri
S&P Margin Compression
Eq Strat: Sell Before May and Go Away
Wells Fargo
April 11: Fourth-quarter 2022 sales/margin results and a more-likely post–Silicon Valley Bank recession scenario give us greater concern regarding 2023 earnings. Margin declines and recessions go hand-in-hand, up to minus-200 basis points [two percentage points] peak to trough in past downturns. Inflation, and its effect on margins, remains a key concern in C-suite commentary.
Our lower view of 2023 estimated
S&P 500
index net margin (now 11.2%, down from a prior 11.6%; 2022: 12.3%) reduces our 2023 SPX earnings-per-share estimate to $200 from $210. We initiate a 2024 estimate at $213.
Christopher P. Harvey, Gary S. Liebowitz, Anna Han
Fed vs. Markets
Below is an excerpt from Pelican Bay Capital Management’s first-quarter letter.
April 10: There is a significant divergence between the Fed’s forecasts for steady interest rates and the bond market’s expectations for future cuts in the federal-funds rate. Through their “dot plot” released at the Fed’s latest meeting, members of the Federal Open Market Committee are forecasting that the fed-funds rate will remain flat through the end of the year. This outlook would leave the fed-funds rate at approximately 5% come January 2024.
Alternatively, the bond market appears to be pricing in a steep drop in the fed-funds rate. As of this writing, the futures contracts for the fed-funds rate are betting that the Fed will cut rates to 3.8% by next January. This is a wide divergence from the Fed’s 5% estimate. Once again, one of these forecasts is wrong, and the embedded assumptions in these forecasts portend widely different outcomes in economic conditions for the remainder of the year.
Equity investors should be concerned about both outcomes. If the Fed is right, and they hold the fed-funds rate flat at 5%, it is because inflation will have persisted at a 4% to 6% level, well above the Fed’s 2% target. The current multiple on the S&P 500 doesn’t incorporate sustained levels of elevated inflation.
In fact, we estimate the S&P is pricing in a return to 2% inflation in the very near future. If inflation proves sticky at current levels, then the valuation multiple on stocks would likely get re-rated to a lower level as investors demand a higher earnings yield to realize a positive inflation-adjusted return. If inflation stays elevated, the price/earnings multiple for the S&P 500 could fall to 12 to 15 times, a material decrease from today’s 18.6-times measure.
If the bond market is right, and the Fed starts aggressively cutting rates this year, what would prompt such a reversal? In our view, the reason the Fed would be forced to pivot and cut rates aggressively would be the result of a moderate or deep recession. A deterioration in economic activity would have negative implications for earnings expectations. Regardless of who is right, the Fed or the bond market, stock prices in general as measured by the S&P 500 are likely still too high.
Tyler Hardt
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Source: https://www.barrons.com/articles/the-dollars-era-of-outperformance-is-ending-how-to-step-away-fffae76d?siteid=yhoof2&yptr=yahoo