This commentary was issued recently by money managers, research firms, and market newsletter writers and has been edited by Barron’s.
Crypto Endgame Isn’t Near
The Leuthold Group
June 24: Cryptocurrencies have long been considered a flash-in-the-pan speculation, bound to end badly.
has fallen from almost $70,000 to about $20,000 since last November and is now only $10,000 higher than in 2017. An asset with a 70% price dive in just seven months is often a sign of bankruptcy! Consequently, given the extreme price collapse in Bitcoin, judgments that the Crypto Craze is nearing its end have again intensified.
That may prove correct. But, overlaying Bitcoin’s chart and the
[suggests] the past six months’ plunge in Bitcoin isn’t that bad. Bitcoin has declined less than between December 2017 and December 2018. Moreover, in 2011 and 2014, Bitcoin experienced even larger percentage drawdowns. That is what Bitcoin does—it rises much more aggressively and collapses much more forcefully than most other investments. Therefore, massive price drops, while eye-catching, don’t suggest the asset class is insolvent.
Even though the price of Bitcoin has fallen nearly three-and-one-half times more than the S&P 500 did from its recent high, they are both at the same price they were in late 2020. It’s a bear market, and while both are down substantially, neither is probably going out of business anytime soon.
James W. Paulsen
Commodities’ Sudden Slump
BMO Capital Markets
June 24: It seems that almost no one now believes that the economy can achieve a soft landing in the face of the current inflation battle—not Fed Chair Powell, the local
driver, Cardi B, nor the majority of Canadians. Each has opined in their own unique communications style that the expansion is at serious risk in coming months. In his testimony to Congress this week, Powell suggested that the path to a soft landing is becoming “more and more challenging,” and that bringing down inflation without driving up joblessness will be “significantly more challenging.” Financial markets are building in those rising risks—this week saw yields and cyclical commodity prices retreat meaningfully…
One key indicator that reinforces the view that growth may soon buckle is the surprising sag in commodity prices. Oil prices dominate the airwaves on this front, and they receded slightly after a big stumble last week. Even with a firming on Friday, they are still close to the lowest levels since early May at around $107 a barrel. North American natural gas prices have taken an even bigger step down, albeit for reasons beyond the growth outlook. Perhaps more telling is the sharp pullback in industrial metals—particularly Dr. Copper. The red metal has dropped almost 20% in the past three weeks and is now at its lowest ebb since early 2021, after hitting a record high in the immediate aftermath of the Ukraine invasion. Many broad measures of ex-energy commodities—even agriculture—are now lower than pre-invasion levels amid global growth concerns.
Markets and Midterms
RBC Capital Markets
June 21: We were surprised by how often the midterm elections came up in our recent conversations with U.S. equity investors, with several reminding us how the stock market tends to be weak ahead of the midterms and tends to rally back about a month before the election takes place. In turn, we’ve reminded investors that stocks tend to be up in midterm-election years, but with returns well below trend, with annual average/median gains of ~6% dating back to the 1930s. We’ve also pointed out that it’s not just the stock market that may get a boost from the midterms later this year. If Republicans have a good outcome, as investors are widely anticipating will be the case based on poor polling data for President Biden and the Democrats, it might also help consumer sentiment. One of the things that has jumped out to us in the University of Michigan consumer sentiment survey is that Republicans are feeling a lot worse than Democrats. While sentiment for both Republicans and Democrats has been sliding in recent months, it’s been hitting new lows for Republicans. Meanwhile, sentiment remains above past lows for Democrats.
The Generals Fall
June 20: The generals have finally been shot. Through June 7, the three best-performing sectors were Energy (+65%), Utilities (+2%), and Materials (-5%). Since June 8, those are the three worst-performing sectors, down 20%, 12%, and 14%, respectively. This has brought overall breadth to near-washout levels. Just 10% of
components are above their 200-day moving average, and 43% of the S&P 500 hit a 52-week low last Thursday. Yields and commodities look to have put in tactical tops, and several of the low-momentum groups (
SPDR S&P Biotech
etc.) didn’t make new lows last week.
While we continue to think a sub-3,500 S&P 500 is likely before a final capitulation event, there has been enough damage done in the near-term to suggest a move higher into the end of the quarter, coinciding with a continued factor-momentum unwind. This means long-duration/growth should lead, while defensives and energy should lag.
Shaky Earnings Outlook
Palumbo Wealth Management
June 18: A recession could impact corporate profits to the tune of 10% to 15%. With 2022 earnings estimates for the S&P 500 still holding at about $225, we see downside to about $200 per share. Apply a 16 price/earnings multiple on those earnings and that brings us to a target of 3,200 for the S&P 500, with the caveat that the market typically overshoots to the downside as well as the upside. Buckle up, it could be a long, difficult summer. But once growth estimates are revised, buying opportunities should appear.
Philip G. Palumbo, Doug Augenthaler
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