Time is the great healer 


The art of managing money as ever is to properly exploit our information set from the complex world of emerging market debt to climate change and broader ESG analysis. The current challenge is that the market is buffeted by so many shocks with uncertain intensity and duration that the market is sitting still wondering what comes next.

What we are certain of is that elevated inflation in many countries, high leverage in China combined with a real estate shock and severe strains in the global supply chain are hurting the global economy and sentiment. For the equity rally to gain a footing, the Fed must bring inflation expectations back under control and we need to see indications that supply chain pressures are easing and that the spike in energy prices is contained. The words of President Vladimir Putin and the IEA on the ability of Russia to deliver more natural gas to Europe help. In other words, we need time.

A market which under stress is overly focused on the near-term will care a lot about upcoming economic data and earnings before steadily relaxing to favor “long-duration” Growth stocks. The question is how much data will it take for this fog to lift. Non-Farm payroll came in on Friday quite below expectations at 194K as Government jobs subtracted. Nonetheless, it was less of a disappointment with revisions with above expectations wage gains, while the household employment survey came in at 526K. This suggests difficulties sourcing workers without raising wages enough, workers who prefer in some cases to leave the workforce. The subdued reaction of equity markets to this suggests that this is no great surprise.

We also need reassurance in the form of analysis of this earnings season. This could give us a sense of cost pressure and pricing strategies as well as forward guidance. Are companies losing customers in low margins business as they pass on cost? Are supplies missing? From this information, we should be able to quickly build a picture of the expected trajectory of inflation from a corporate point of view born out of the company’s experience and the information they get from their investment banks.

Finally, the deal on the US debt ceiling helps sentiment while the market will likely welcome the delivery of a much reduced human infrastructure bill in the coming weeks.

What does it mean?

The odds are that we teeter on the edges of a larger correction in global equity markets as we are lost in the fog, but this is precisely when equities rally in a wall of worry and fear. As we quickly fade fear, it is steadily time to invest again, including in North American equities but also European inflation bonds with its large opportunity set. However, this is also a reminder of the value of diversification and that some Styles such as Growth and Quality paint a long-term future that is quite unlikely.

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