{"id":13208,"date":"2024-08-09T12:06:12","date_gmt":"2024-08-09T16:06:12","guid":{"rendered":"https:\/\/www.rbcwealthmanagement.com\/en-asia\/?p=13208"},"modified":"2024-08-09T12:06:13","modified_gmt":"2024-08-09T16:06:13","slug":"nagging-questions-facing-equity-markets","status":"publish","type":"post","link":"https:\/\/www.rbcwealthmanagement.com\/en-asia\/insights\/nagging-questions-facing-equity-markets","title":{"rendered":"Nagging questions facing equity markets"},"content":{"rendered":"\n

By Kelly Bogdanova
Vice President, Portfolio Analyst
Portfolio Advisory Group\u2013U.S.<\/p>\n\n\n\n

<\/p>\n\n\n\n

\n The U.S. and global equity market selloff is still in the process of playing\n out, in our view.\n <\/p>\n

\n Pullbacks and corrections usually take weeks or months to fully resolve\n themselves, rather than just a few trading sessions. This process should be\n familiar to those who have been invested in recent years, and especially to\n those who have been invested for decades. And a pullback shouldn\u2019t be\n surprising following a 37.6 percent surge in the S&P 500 from the October\n 2023 low through the peak in mid-July 2024.\n <\/p>\n

\n There are still open questions about the main factors associated with the\n selloff.\n <\/p>\n

\n \n Are the weak U.S. employment and manufacturing data a harbinger of further\n domestic (and therefore global) economic deterioration?\n <\/strong>\n <\/p>\n

\n It\u2019s clear to us that some areas of the U.S. economy are wobbly and others are\n weak. But it\u2019s unclear whether this will end up being a brief hiccup, a GDP\n \u201cgrowth scare,\u201d or a full-blown recession.\n <\/p>\n

\n Just because a majority of the leading economic indicators in our\n Recession Scorecard <\/rbc-icon><\/a\n >\n are now flashing red doesn\u2019t mean that a recession is inevitable. RBC Global\n Asset Management, Inc.\u2019s Chief Economist Eric Lascelles pegs the current risk\n of recession at 40 percent, up from 35 percent previously. But if the data\n deteriorate further and eventually push other leading indicators to red, the\n likelihood of recession could rise.\n <\/p>\n

\n And as stated in our\n market update <\/rbc-icon><\/a\n >\n following Monday\u2019s sharp selloff, we\u2019re mindful that GDP growth scares can\n cause deeper downturns than what the S&P 500 has experienced thus far with\n its 8.5 percent selloff from the mid-July peak through the low on Monday,\n August 5.\n <\/p>\n

\n Growth scares happen when market participants fear a recession for one reason\n or another, and begin to price this into stock indexes, but the economy ends\n up avoiding a recession. The S&P 500 retreated 19 percent, on average, in\n the five growth scares since the global financial crisis, yet the market\n powered back soon thereafter as economic and other risks faded. These ended up\n being classic buying opportunities.\n <\/p>\n \n

S&P 500 pullbacks during post-financial crisis \u201cgrowth scares\u201d<\/h3>\n \n
\n \n \n \n Event<\/th>\n \n Decline details\n <\/th>\n \n Cumulative return after the bottom\n <\/th>\n <\/tr>\n \n Market peak date<\/th>\n Days to bottom<\/th>\n Decline %<\/th>\n 6 months<\/th>\n 9 months<\/th>\n 12 months<\/th>\n <\/tr>\n <\/thead>\n \n \n European debt crisis<\/td>\n 4\/23\/10<\/td>\n 70<\/td>\n -16.0%<\/td>\n 23.0%<\/td>\n 30.3%<\/td>\n 31.0%<\/td>\n <\/tr>\n \n U.S. debt downgrade<\/td>\n 4\/29\/11<\/td>\n 157<\/td>\n -19.4%<\/td>\n 28.6%<\/td>\n 23.2%<\/td>\n 28.7%<\/td>\n <\/tr>\n \n Industrial recession<\/td>\n 5\/21\/15<\/td>\n 266<\/td>\n -14.2%<\/td>\n 19.5%<\/td>\n 18.5%<\/td>\n 26.6%<\/td>\n <\/tr>\n \n QT & U.S.\/China trade dispute*<\/td>\n 9\/20\/18<\/td>\n 95<\/td>\n -19.8%<\/td>\n 18.2%<\/td>\n 20.0%<\/td>\n 32.0%<\/td>\n <\/tr>\n \n Inflation surge & Fed rate hikes<\/td>\n 1\/3\/22<\/td>\n 282<\/td>\n -25.4%<\/td>\n 14.4%<\/td>\n 25.0%<\/td>\n 21.6%<\/td>\n <\/tr>\n \n Average<\/strong><\/td>\n <\/td>\n 174<\/td>\n -19.0%<\/td>\n 20.7%<\/td>\n 23.4%<\/td>\n 28.0%<\/td>\n <\/tr>\n <\/tbody>\n <\/table>\n <\/div>\n \n

* QT stands for the Fed\u2019s quantitative tightening.<\/p>\n

\n Source – RBC Capital Markets U.S. Equity Strategy, Haver Analytics, RBC Wealth\n Management, Bloomberg\n <\/p>\n \n

\n \n Is the widespread concern among market participants that the Federal Reserve\n has fallen behind the curve in cutting interest rates valid?\n <\/strong>\n <\/p>\n

\n In such periods of economic uncertainty, and especially following a major rate\n hike cycle like the one that has just occurred, it can be difficult for the\n Fed to thread the needle with a new cycle of well-timed and well-calibrated\n rate cuts. There are historical examples when the Fed missed the mark. And\n sometimes rate cut cycles begin when the economy is in worse shape than is\n commonly thought or known.\n <\/p>\n

\n \n Are the earnings stumbles of some technology and consumer firms signaling\n that the profits story in the U.S. and elsewhere is starting to crack?\n <\/strong>\n <\/p>\n

\n RBC Capital Markets, LLC\u2019s Head of U.S. Equity Strategy Lori Calvasina\n correctly points out that the S&P 500 Q2 earnings season statistics have\n been relatively good overall and management team commentaries have been\n balanced, not negative. Both the Magnificent 7 and non-Magnificent 7\n categories have posted earnings growth in Q2, and the S&P 500 consensus\n forecasts of $242 per share this year and $277 per share next year have been\n stable over a period when they have historically eroded.\n <\/p>\n

\n There are, however, pockets of weakness. Softer consumer trends have been\n revealed within a number of company reports. Sean Naughton, who leads the team\n that manages RBC Wealth Management\u2019s proprietary equity portfolios and who was\n previously a capital markets analyst covering large retail firms, points out\n that when it comes to consumer spending slowdowns, such indicators of weaker\n demand \u201chave a tendency to be melting icebergs.\u201d\n <\/p>\n

\n \n Was the Bank of Japan-inspired upending of leveraged trades in equities and\n other risk assets just a one-off unwinding of risk positions among\n institutional investors that were poorly positioned in crowded trades, or\n was it something more?\n <\/strong>\n <\/p>\n

\n Our Asia team believes the unwinding of the yen carry trade has largely run\n its course, and institutional investors seem like they\u2019ve repositioned.\n Following much criticism by market participants, economists, and others about\n the BoJ rate hike and the central bank\u2019s hawkish comments on July 31 which\n prompted the volatility, a BoJ deputy governor reversed course by speaking in\n more dovish tones on Tuesday. This helped calm markets and prompted bounces in\n equity markets, and the yen weakened against the U.S. dollar.\n <\/p>\n

\n Yet we are still left bothered by the entire episode. To us, it was\n confirmation that some fast-money hedge funds were concentrated in crowded\n momentum trades and were over-leveraged. We\u2019ve seen this movie before and are\n cognizant that other \u201cvolatility episodes\u201d created by hedge fund positioning\n can occur.\n <\/p>\n \n

Defensively-minded<\/h2>\n

\n We believe there are enough lingering risk factors associated with this\n selloff to prompt a review of equity portfolio positioning. As RBC Wealth\n Management, Inc.\u2019s Investment Strategist Jim Allworth\n wrote<\/a\n >\n in the August Global Insight, planning for an eventual shift to defensive\n equity positioning beats a \u201chope for the best\u201d approach.\n <\/p>\n

\n To us, this means holding no higher than a Market Weight position in U.S. and\n global equities in portfolios for the time being, and having a plan to shift\n the weighting downward if capital preservation becomes a priority.\n <\/p>\n

\n Within equity portfolios, we would tilt exposure defensively, with an emphasis\n on high-quality dividend-paying shares.\n <\/p>\n

\n This doesn\u2019t rule out holding growth stocks. But we would limit such holdings\n to quality growth \u2013 those companies with strong management teams with\n battle-tested track records, prospects for strong cash flows rain or shine,\n sizeable cash positions so that management teams can be opportunistic with\n capital investments and\/or acquisitions, realistic earnings growth prospects,\n and reasonable price\/earnings-to-growth ratios.\n <\/p>\n

\n We think core equity holdings should be confined to stocks that can better\n withstand further economic deterioration or a recession, with valuations\n supported by prospects for earnings growth.\n <\/p>\n","protected":false},"excerpt":{"rendered":"

Four unresolved issues related to the selloff stand to hold sway over stocks. More volatility is likely, and we favour a defensive tilt in equity portfolios, focusing on high-quality shares that can better withstand further economic deterioration.<\/p>\n","protected":false},"author":15,"featured_media":13209,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"rbcwm_post_date":"2024-08-08T11:56:43","editor_notices":[],"rbc_url_alias":"","rbcwm_featured_desktop_image_position":"","rbcwm_featured_mobile_image_position":"","_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[42],"tags":[448],"rbcwm_content_owner":[390],"rbcwm_need":[],"rbcwm_segment":[],"rbcwm_solution":[],"rbcwm_topic":[212],"rbcwm_channel":[],"rbcwm_format":[],"class_list":["post-13208","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-analysis","tag-equity-market","rbcwm_content_owner-pag","rbcwm_topic-global-insights"],"acf":{"rbcwm_subtitle":"Four unresolved issues related to the selloff stand to hold sway over stocks. 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