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23 May 2022 - Bulls register a (small) win for a second week in a row

The S&P500 managed to close yet again above 3860, the level which signals the bear market territory, despite the big pressure of the last days of the week. This small win for the bulls takes even more importance as it came after an almost 2% drop on Friday, which was fully reversed during the last 30 minutes or so of the session. Still, however US markets finished lower on a weekly basis. Europe managed to close with small weekly changes except for the Swiss market which fell by 3%, primarily due to the weakness of Nestle shares. Chinese shares seem to have found their bottom a few weeks ago, as they moved higher for the second week in a row.

Consumer Staples was the worst performing sector, as results from Walmart showed pressure on profit margins, revealing the first signs that even this defensive sector which includes food companies and retailers among other cannot be totally immune from inflation. Investors had flocked to this sector in April, trying to find a refuge, but this overcrowding led again to a slump as short-term traders abandoned the stocks with ease. From a fundamental, long-term view the sector is getting again attractive after the expensive territory it found itself recently.

The PBoC (central bank of China) disappointed by not cutting the benchmark interest rate, despite such speculation. But it lowered the bottom boundary of the mortgage rates for the first-time home buyers, showing to the world that it does not want to engage in a “bazooka” type monetary easing, as was the case in Europe and the US during the pandemic. But rather they want to stimulate the economy with very targeted measures. Discipline at its best.

The first signs of a Covid19 slowdown appeared in China. According to local reports, parts of Shanghai are now Covid-free, and the first shopping malls are expected to open again in the coming days. We should be over the worst part of the pandemic in the region.

US April Retail Sales increased by 0.9%, in line with expectations. Although this figure includes the effect of inflation on consumer prices, it is still a sign that the US consumer is holding tight. Ex-autos, Retail Sales actually increased more than expected (0.6% vs 0.3%).

The main source of market nervousness last week was the fear of recession in the US. Goldman Sachs was another investment bank, whose economists lowered their forecast for GDP growth both in 2022 and 2023. They now expect a 2.4% growth this year (vs the previous forecast of 2.6%) and 1.6% for next year (vs 2.2%). Still, these numbers do not show a recession but rather a slowdown in economic activity.

Bond yields moved significantly lower (and prices higher), as a recession will eventually make the FED slow down its aggressive monetary policy tightening. The US 10-year yield dropped to 2.80%, down from 3.20% two weeks ago, while the 3/5- year yields also moved lower to 2.75%, making the proposed initiation of positions in this segment already profitable for investors.

Gold managed to recover from its trip below 1800, to close the week at 1840$. The move came as the USD weakened significantly from the recent lows. The EURUSD jumped to almost 1.0600 after hitting a low of 1.0400 at the start of the week.

In corporate news, Warren Buffet revealed that he had acquired a 3% stake in Citigroup, during the recent market turmoil, in a vote of confidence in the US banking sector. Banks such as JP Morgan and Goldman Sachs now trade close to mild recession level valuations, already having partially discounted such an economic outcome.

Equities: Weekly Performance


Charts of the Week

11% differential in favor of Europe since the March lows

The green line is the performance of the Eurostoxx50 since the lows of March, a few days after the invasion of Ukraine. The blue line is the performance of the S&P500 in the same period. There has been an 11% differential in performance in favor of Europe in just two and half months. What is more impressive is that the Eurostoxx index is positive by 4% since than day, while the US index has lost almost 7% of its value. The collective thinking that the US market is much more insulated from the war in Ukraine and that is should perform better than Europe has not held. There are a few explanations of this behavior. First, European stocks had already fallen a lot during the first days of the invasion, while the US had not. Secondly, the Eurostoxx50 is already trading at recession levels, which means that a lot of bad things had already been discounted in the prices. Finally, the US has a much worse inflation issue than Europe and the FED is about to engage in a much more aggressive change of monetary policy. However, from current levels the US markets might start outperforming again.

Ultra-growth stocks have probably bottomed

The ultra-growth stocks, those who had been the main beneficiary of the pandemic (Zoom, Moderna, Peloton etc.) have been on a free fall since early 2021. Most stocks are down between 70% and 90% from their peaks, while this year alone they are down almost 50%. Taking the ARK Innovation ETF as a proxy, one can see in the above chart its price performance since the beginning of the year. We argued a few weeks ago that this bubble that burst first , should be the one to find its bottom. We are now seeing some first signs of this. This past week Nasdaq fell to a new low, while the S&P500 touched intraday a new low for the year. But the ultra-growth stocks, despite some pressure, are oscillating/consolidating (yellow circle) comfortably higher than the early May lows . This should not be taken as an advice to buy this sector. Our main focus is trying to find a bottom for the broad market. Our argument is that ultra-growth would bottom first, followed by Nasdaq and then the S&P500. The week that starts will probably show that Nasdaq has also probably bottomed, for now.



• The content of this document has been produced from publicly available information as well as from internal research and rigorous efforts have been made to verify the accuracy and reasonableness of the hypotheses used. Although unlikely, omissions or errors might however happen.

• The data included in this document are based on past performances and do not constitute an indicator or a guarantee of future performances. Performances are not constant over time and can be positive or negative.

• This document is intended for informational purposes only and should not be construed as an offer or solicitation for the purchase or sale of any financial instrument and it should not be considered as investment advice. The market valuations, views, and calculations contained herein are estimates only and are subject to change without notice. Any investment decision needs to be discussed with your advisor and cannot be based only on this document.

• This document is strictly confidential and should not be distributed further without the explicit consent of Kendra Securities House SA.

• Sources: Equity performace: Factshet, Chart 1&2: Factshet


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