by Bryan Perry

August 9, 2022

One of the most exciting races in all of track and field is the 110-meter-high hurdles, a fierce event that requires extreme focus, grit, and determination to succeed in clearing all 10 hurdles without hitting one so hard that it prevents your victory. On August 19, 1981, Renaldo “Skeets” Nehemiah stunned the track and field world as the first man to run the 110m (120.3 yards) hurdles in under 13 seconds, clocking a 12.93.

As a member of the Virginia Tech Track & Field team during 1981 (Class of 1982), I had the privilege of meeting Skeets in the infield at an all-conference meet at Florida State, stretching out before the men’s 880-yard relay. He had already torched the field in the 110 highs and was going to run the anchor leg for the Terrapins in the 880-yard relay. As I watched him take the baton, it was as if his feet never touched the ground. He ran his 220-yard leg in 19 seconds flat, an unofficial world record time for a 220 split.

It is always fun to share a memory about meeting someone very special and very humble, but it also makes for an apt metaphor to compare what the market faces in the next several weeks – a series of high hurdles to clear before it gets to what could well be the year-end handoff to a record-setting finish.

Not only did the market put up a good fight to hold the mid-June lows, but it made up a decent portion of the year’s losses during July. Led by the all-important big-cap technology sector, growth stocks came back into fashion as lower inflation and expectations of fewer rate hikes took hold of investor sentiment.

The latest stronger-than-forecast data from the labor market and manufacturing sector has the Atlanta Fed raising its GDP estimate to +1.4% for the third quarter from the negative -1.9% for the second quarter. That’s a notable swing of 3.3% to the good! And, with over 80% of S&P 500 companies having posted second-quarter sales and earnings that exceeded estimates, the market found good footing to build on.

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

The next hurdle that will heavily impact market sentiment will be when the Consumer Price Index (CPI) for July is released tomorrow, and the Producer Price Index (PPI) on Thursday. While food and energy prices have clearly come down, the cost of rent, professional services, skilled and hourly workers have probably increased. The market has been betting heavily of late that inflation has already peaked, so any numbers that come in above the consensus could take bond yields higher and stock prices lower, and any expectations of more Fed rate hikes could spook investor sentiment, so this is an important week.

Investors shouldn’t be too complacent about the market’s newfound lovefest with the change in narrative about the economy skirting a recession, since there are deep problems in other major economies around the world. While inflationary forces in the U.S. will likely begin to diminish as the year progresses, the same cannot be said of Europe, which faces stubbornly high prices for natural gas, food, and other items.

If there is no relief in the price of natural gas, Europe is facing a grim winter of record inflation. Russia has now stated they are slashing the supply of gas through the Nord Stream 1 pipeline to just 20% of capacity to pressure Germany and the EU to stand down in their support of Ukraine. Top EU officials say Russia is blackmailing Europe and “weaponizing” its gas supplies. Moscow has denied these accusations.

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

Japan’s economy is #3 in the world and faces inflation challenges in a weakening global economy that could pressure its export-driven economy. Japan is adding an additional $2 trillion to is mountain of debt, now at 230% of GDP, the highest in the world. The Bank of Japan has almost no choice but to keep bond rates low, so it can service its debt, but in doing so, the yen is down over 20% in the past year.

For decades, the yen was considered a “safe haven” currency, but its recent decline shows what can happen when a nation’s debt soars to where it compromises the currency in a country that faces an aging society, a declining birthrate, labor shortages, and highly restrictive immigration laws. The current supply chain snarls and more bouts of Covid only compound a very difficult set of economic conditions.

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

China has its own set of high hurdles. It’s slumping property market and shadow banking industry are under serious stress, with the government having to orchestrate broad refinancing measures to avoid widespread bankruptcies. China will not be able to meet its year-end GDP goal of 5.5% if it continues to wage full lockdowns amid Covid outbreaks, as the world’s second-largest economy slowed sharply in the second quarter, missing market expectations with a meager 0.4% increase from a year earlier.

On top of that, capital outflows from Chinese bonds and equities continued for a sixth straight month, with the U.S. threatening to delist major Chinese ADRs due to regulatory and disclosure violations. Tensions with the U.S. over its support for Taiwan add a possible flash point that is keeping capital away from those markets. A view of the China Large-Cap iShares ETF (FXI) shows a very troubling pattern, in which that market could test its late 2008 low, marking a 14-year period of stagnant market conditions.

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

Sadly, Hong Kong, once the shining light of Asia – where East meets West in freedom and peace – has seen its equity market retreat 40% from its 2018 highs after China’s virtual takeover of the country. The Hang Seng Index now trades at the same level as in 2007. This week, videos of Chinese tanks on streets to disperse agitators fuming at not being able to withdraw funds from their bank accounts have gone viral as the government now grapples with growing civil unrest. So much for The Great China Experiment.

The war in Ukraine only adds further uncertainty to this set of hurdles for the global economy. Because the U.S. accounts for roughly 25% of total global GDP, it is considered a safe and investible market for now, as economic conditions are stable, the dollar is strong, and so is the labor market. This is a big reason why capital from around the world seeks shelter and opportunity in U.S. bonds and equity markets.

There is still an incredible amount of uncertainty with inflation, interest rates, energy prices, commodity prices, and geopolitical situations that could flare up at any time. As some of these metrics clear up in the months ahead, investors will gain much-needed insight into these and other risk factors to determine if the recent gains hold and build, or whether another retest of some lower level for the market is in order.

All content above represents the opinion of Bryan Perry of Navellier & Associates, Inc.

Please see important disclosures below.

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No More Recession Talk for Now

Sector Spotlight by Jason Bodner
Do We Dare Utter the Words “Bull Market” Yet?

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About The Author

Bryan Perry

Bryan Perry
SENIOR DIRECTOR

Bryan Perry is a Senior Director with Navellier Private Client Group, advising and facilitating high net worth investors in the pursuit of their financial goals.

Bryan’s financial services career spanning the past three decades includes over 20 years of wealth management experience with Wall Street firms that include Bear Stearns, Lehman Brothers and Paine Webber, working with both retail and institutional clients. Bryan earned a B.A. in Political Science from Virginia Polytechnic Institute & State University and currently holds a Series 65 license. All content of “Income Mail” represents the opinion of Bryan Perry

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