The US equity market is not out of woods yet but I believe we may have reached a bottom. The Fed has effectively raised rates without raising rates and this has bludgeoned consumer and business sentiment. Lending costs, especially for housing has shot up far more than the 75pb Fed funds rate.
1- Inflation may have peaked or is close to it as seen in many corporate results. The margin squeeze is indicative of lower demand or at least consumer/business unwillingness to pay up. And in a competitive open market economy those with the best value proposition win and those that are second or farther down simply cannot afford to lose share with higher prices.
2- Commodity prices are basically stable now, after big run ups on supply/capacity and logistic disruptions. However, I do not believe we can expect or assume prices will fall much. Large swaths of the oil, metals, mining, agro economy are practicing capital discipline, not ramping up capacity on higher prices.
3- The Fed speak shifted rapidly from getting the economy on its feet post pandemic to a war on inflation and accepting a recession to do it. This drove rates , as seen in US Treasury and mortgages up rapidly and destroyed fixed income funds and even the notion of bond safety as an asset class. It scared the market and drove equites down considerably as well. Now it seems the Fed may take a break in September, or that rates may not need to jump to 3% so fast or at all.
4- Valuations: The key to the puzzle. As I have written in the past, valuations were too high for a messy senario foreseen at the start of the year. Both the NASDAQ and SP500 where at least 25% above a reasonable PE or EV/EBITDA under a 3% Fed Funds rate. Now they are near those levels. However, the Indexes are tech heavy with the Mega Caps dominating 30% of the SP500 and 50% of the Nasdaq100. Many stocks are substantially below the average, even some high growth tech names. The market has largely corrected.
The Escudo strategy has begun to take exposure to some higher quality “Tech” names that are not value stocks but have considerable competitive advantages in a slow growth and still higher inflation environment.