As an analyst, my job is to give you a thoughtful look into different markets.
Often, I go back and forth on what the data is telling me. There are always two sides to every argument, and typically you end up reading what I — and the rest of eToro’s excellent research team — agree on.
The market seems to be a bit one-sided these days, though. There’s a lot of fear and doom-scrolling — so I’m going to play devil’s advocate for you.
Playing devil’s advocate can be annoying. Everybody has that friend that always asks “what if?”, right?
But there’s a point to doing this. It can challenge our preconceived notions and help us prepare for the unexpected. Any seasoned investor can tell you how important it is to explore the other side, especially when it seems like the whole market has crowded to one side of the boat.
So today, let’s explore the contrarian — but possible — scenarios that few are talking about.
What if…inflation has already peaked?
The crowd: It’s tough to escape the signs of inflation. You see it in gas prices as you drive down the road. You see it at your grocery store. It’s the 1970s all over again and it is possible we’re heading for a period of dreaded stagflation — lower growth with persistently high inflation.
The contrarian: Inflation is high. No doubt about that. But we may be past the peak of inflation, and that matters in the market’s eyes. Take the cost of a shipping container— the poster child of inflation late last year. It’s dropped 16% this year. Crude oil prices have slipped about 20% since the height of Ukraine tensions. Used car prices are down 6% since January.
Besides, high inflation could be old news for a market that’s always looking to what’s ahead. Breakeven rates — or the bond market’s built-in inflation expectations — peaked at the end of March. We’ve seen signs of life in airline and restaurant stocks, two industries that were hammered earlier this year for inflation concerns. Maybe Wall Street is positioning for where inflation could be going, not where it’s at.
What if…the economy is stronger than we think?
The crowd: The Fed is out of touch with reality. Fed chair Jay Powell has stated he wants to hike at the cost of growth. Consumers’ outlook on the economy is the worst since the 1960s, according to a University of Michigan survey. And did you see the first quarter GDP report? Stagflation. There may be cracks forming in the foundation and rate hikes could break them open.
The contrarian: For all the hand-wringing about the economy’s impending doom, it’s hard to make a case for recession in the data. Let’s check in on some leading indicators, or the classic metrics that tend to turn before the economy turns.
Durable goods orders show demand is strong. Companies are investing money back into their businesses, not hunkering down for a storm. The job market is chugging along. The first quarter GDP report actually showed solid consumer and business spending, but growth was weighed down by a drop in trade activity.
If you’re expecting a recession borne by systemic weakness — instead of an unforeseen event like COVID— you would likely see more cracks than this. Maybe we’re getting too worried over a crisis that could happen, not necessarily a crisis that is happening.
What if…Cathie is right?
The crowd: Tech has been clobbered this year. Take a look at the tech-heavy Nasdaq 100 and you’ll see what I mean.
Few people have felt tech’s pain more than Cathie Wood, the founder of Ark Investment Management, whose firm has notoriously bought big positions in more speculative technology companies. The top three holdings of Ark’s flagship fund — Tesla, Zoom and Teladoc — have fallen 71%, 29%, and 76% from their 52-week highs, respectively. Yikes.
It seems like tech has fallen out of favor, possibly for a while. Makes sense— higher rates theoretically discount future growth, and most tech fits squarely in the growth stocks camp. Plus, those impending rate hikes.
The contrarian: For all the ribbing Cathie has (rightfully) dealt with, she may be onto something. Society is innovating at the speed of light, and there could be some interesting stories hidden in the tech sector. The Nasdaq 100 is now trading at the lowest forward price-earnings ratio in two years, showing that there could be some value out there. Sometimes, volatility is the price you pay for taking on risk.
And even though this isn’t Cathie’s hypothesis, the Fed may provide a spark of its own for growth-oriented stocks. The market has prepared for 11 total 25-basis point rate hikes this year, according to Fed funds futures. That’s a lot, especially considering the Fed has only actually hiked once. It’s possible that investors have overestimated how much the Fed could actually boost rates, especially if inflation has actually peaked. We think the Fed’s tendency to over-communicate, while prudent, may have instilled too much fear into the market.
Our view
Markets are swinging, but we’re optimistic that the economy is on the right track. Stocks and crypto have absorbed a lot of bad news this year, yet both have stayed relatively resilient. Now that markets have baked in close to a worst-case scenario, they could perk up at any “less bad” news down the road. And, in the end, expectations may matter more than hard numbers.
Even if you’re not feeling rebellious, remember that it could be wise to prepare for all scenarios, not just the obvious ones. If you want to prep your portfolio, think about employing a barbell strategy, where you pick up investments that have opposite profiles.
*Data sourced through Bloomberg. Can be made available upon request.