June has been a challenging month for investments as stocks, bonds and even energy prices saw a fall. On the currency front, every major currencies weakened against the USD, further clobbering the non USD denominated investments. Even Gold, which the traditional hedge against inflation fell double digit. There is literally no where to hide from the fall as all traditional hedge assets such as bonds and gold failed to do their job. The popular iShares 20+ Year Treasury Bond ETF is down 22% this year, while the Singapore Government Bond UCITS ETF which only holds Singapore government bonds is down 7.6%. However, the good news is, we may have reached an inflection point where we are near to the bottom of the bear market. Here are some of the indication that a market bottom is reached.
1) Market does not plunge on a worsening key economic indicator
The US inflation data in June was worse than the historical amount in May coming in at 9.1% as compared to the 8.3% in the previous month. However, the US stock market rallied on that day instead, and as investors choose to focus on the falling oil price, which has fallen below $100 since the Russia-Ukrainian war. Much of the inflation is as a result of the high energy prices. Given that the market suddenly choose to focus on oil prices rather than the inflation data, which the market has been dancing to in the past few months, is an indication that the market is turning around the corner and is choosing to focus on the good news to rally on in the midst of a slew of lousy news.
2) VIX - The fear index is holding steady and tapering
The VIX index is also called the fear and greed index as it measures a ratio of call and put options. Options are financial instruments which investors buy as a form of insurance, against future price movement and give an indication what investors think in the longer term. When the index is high, it means that many investors are buying put options to protect themselves. If you look at the VIX index during the COVID-pandemic recession, the level is at a record high, even higher than the levels during the 2008 financial crisis and the 2000 dot-com crash. The VIX has been elevated ever since the start of the Russia-Ukrainian war, but it did not reach the levels of 2008 financial crisis and the VIX index is tapering down. This means that investors are not expecting gradually coming back down. This means that investors do that think that the current bear market will be a long lasting one and is comfortable not to buy insurance to protect themselves over the long term. A stable and downward trending VIX is another good indication that the market may recover soon in the future.
3) Company earnings are still good despite rising inflation
Despite the growing recession fears, S&P 500 companies are expected to post a 4.2% increase in second-quarter profit, according to consensus analyst estimates. S&P 500 members are also expected to post a 10.2% increase in revenue for the period. Profit expectations for the full year are still high with S&P 500 companies estimated to post a 9.9% earnings increase for 2022. With the inflation news headlining every major news outlet, this gave companies the chance to raise their prices, preserving their profit margin, while pushing the blame to the on-going war and the incompetency of the US Federal Bank and government. This data is further reinforced by the employment data.
US employers added 372,000 new positions last month, with gains across a range of industries and private-sector employment recovering all of its pandemic losses. The unemployment rate, meanwhile, remained steady at 3.6 percent for a fourth straight month.
The greatest fear that investors have is that inflation and rising interest rates will crippled the demand of consumers and soften the profitability of companies. As we proceed into a new economic environment of higher inflation and higher interest rate, and with the data little impact on company's profitability, than there is a good chance that the market will not only stabilize, but also rally.
However, outside of U.S. ,the data may not be so promising as a rapidly rising US dollar and interest rates will be crippling to countries with high foreign debt, further weakening their currencies and making the inflation worse in emerging market economies. The latest victim is Sri Lanka as the country ran out of foreign reserves to buy oil and the angry people stormed the presidential palace leading to a change in regime and a meeting with IMF to negotiate for a bail-out. The Euro also reached parity with US dollar for the first time, potentially worsening the inflation situation in Europe, on top of a huge disruption due to the Russia Ukrainian war. We will examine the situation in other countries in our next newsletter.
Portfolio Strategy
The portfolio will continue to pursue a US focused strategy as the rising USD will help to cushion any losses.
The portfolio has performed -6.30% for Cash and -4.80% for CPFIS-OA for the month of June.
If the data continue to hold in the coming month, I will continue to move more of the bond allocation to the equity component, to take advantage of a possible bottom of the bear market. This will help to position the portfolio to recover better when the recovery rally comes and will allow the portfolio to recover back up quickly to the previous level. Customer with some excess cash can consider to start putting them in tranches into the portfolio to take advantage of the current low levels.
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