US momentarily dips into official bear market territory

May 23, 2022
The seventh negative week in a row for the US sent it briefly into official bear market territory before it recovered slightly late on Friday. The world’s largest stocks (Apple, Microsoft Amazon and Google) are all down 25%.

The week that was

The seventh negative week in a row for the US sent it briefly into official bear market territory before it recovered slightly late on Friday. However, no-one is really quibbling over the fact that the year so far has proven to be a watershed for markets with the darlings of the post-COVID rally leading the market down. The world’s largest stocks (Apple, Microsoft Amazon and Google) are all down 25% (with Apple being a relative outperformer and ‘only’ down 17%). Last week was essentially more of the same for this end of the market with each down by around another 5% and Tesla down 13% after Elon Musk’s buy out of Twitter seemed to be in doubt (and bringing the worlds still most valuable car maker’s year to date losses of some 35%). The difference last week was that traditional retailers Walmart, Target and Costco were all also down 15-30% after weaker than expected earnings. This cast doubt on the apparent resilience of the US consumer and raised concerns over an imminent recession.

That left the US market down 3% for the week and Europe down a percent or so while Asian markets were actually up for the week, led by resurgent Asian tech shares.  Taiwan Semiconductor and Samsung were both up strongly last week having also fallen 25% from their highs at the end of last year. This may auger well for the global economy or it may have been also related to the increasingly emphatic messages from the Chinese authorities that they would not only do everything to support their locked-down economy but would no longer stand in the way of their national tech champions. Stocks like Alibaba are now more than 50% off their 2020 highs. Perhaps it’s therefore not surprising that some growth and value managers alike are finding opportunities in Asian tech but for now it’s only the braver ones.

The Australian market was also up largely due to the big miners, no doubt also buoyed by the noises being made by the Chinese government while the banks were also slightly up. At the other end of the ledger Consumer Staples stocks like Wesfarmers and Woolworths were down around 6%, perhaps rejecting the fears in the US that this combination of slowing growth and continued pricing pressure might not be so easy to pass onto the consumer. The local IT sector bucked the trend for tech companies and was up by 5% with most companies up strongly - perhaps the recent bid for Infomedia (up almost 40% in the last 2 weeks after a private equity backed bid) has raised hopes.

The government bond market was a little more subdued last week and yields actually fell back a little in the two markets that matter the most to Australians - our own and the dominant US market. There were tentative signs in the TIPS (Treasury Inflation Protected) markets that future expectations of inflation were starting to move downwards. In Europe on the other hand the headlines were dominated by evern higher current inflation readings and yields edged up again, albeit form still very low levels. Reflecting increasing recession fears credit spreads continued to inch up and somewhat significantly, they have reached the level where they got to in December 2018 when we had a mini-credit crises and the Federal Reserve moved overnight to relieve it by providing liquidity and lowering rates. They are still some ways off the highs that we saw in the GFC and in March 2020, and the Federal Reserve will no doubt be quite pleased with the slow motion nature of this particular credit de-rating. We continue to keep an eye on this and also where there were more signs of some high yield stress but it seemed to be restricted to some of the highest risk corners of the market.          

As many expected, the Australian election, as polemical as it has been for the local population, has not so far had much of an impact on local bond markets, the equity market or even the currency. Looking forward the release of the US Federal Reserve’s minutes for their last meeting and the implications for the cost and availability of money around the world it's likely to have a greater impact.

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