A Midsummer Nights Dream....

or a nightmare maybe given how markets are performing at the moment. I'm conscious that I didn't provide much of an update last month as I was away on holiday. So having caught up with a few things after that, I thought I'd share a mid summer update of those as we had the longest day yesterday and hopefully you had some good dreams rather than nightmares last night. 

It seems we are now officially in a bear market as various indices have now fallen by more than 20% for what that it worth - tell me something I don't know I can hear you thinking. Well one thing I missed while I was away was a terrific memo from Howard Marks of Oaktree capital which touches on the subject of bull and bear markets and the psychology behind them. While it doesn't provide any forecasts I thought it was a brilliant discussion of the recent period and previous episodes or bull & bear events that we have been through. If you haven't seen it I'd highly recommend getting a cup of tea, coffee or cold beverage of your choice and give it a read here: Bull Market Rhymes.

Aside from that Ray Dalio put out another piece the other day about the outlook and he seems to be suggesting that people are being too complacent and that the outlook is for a period of stagflation as the Fed struggles to fight inflation and avoid a recession. Again you can read that here if you want and you haven't seen it already. While I'll add a couple of videos featuring him at the end if you want to explore his thinking in more detail in an audio visual way.

Finally I saw an interesting article in the FT today which ties into the bear market psychology and the economic outlook. The crux of the authors (Ian Hartnett) argument  seems to be depressingly that we maybe half way through the bear market which thus far has been driven by a large de-rating which rhymes with the experience so far. 

Beyond that he seems to suggest that analysts are being over optimistic given the economic indicators and that wouldn't be the first time that has been the case! Indeed looking at those indicators he suggests that top down overall US  earning could fall by 10 to 15% versus the consistent growth pencilled in by analysts. While in Europe he sees earnings top down being vulnerable to a 20% decline at the headline index level. At the stock and sector level he naturally suggests cyclical sectors such as industrials, tech hardware and oils may be the main drivers of that. While he goes onto point out that analysts seem to have downgraded growth expectations for growth sectors more quickly than for value sectors so that perhaps growth sectors may be less vulnerable to downgrades from here. While I guess that growth could be seen as more valuable in a low / slow stagflation environment .

Any way food for thought and of course he may not be right and the analysts may be for once, but as Howard Marks pointed out it doesn't pay to believe in it being different this time generally.  With that in mind I'll try to remember that when I do this months screening as I have a couple of more cyclical names that have seen their Scores decline, while their estimates have held up ok albeit with some downgrades. One might think given economic condition that they might trade their way through it but maybe I'm falling into the same trap as the analysts there, so food for thought for sure. 

So depressingly, if Mr. Hartnett is right, we may only be about half way through the bear market, with the earnings downgrades potentially triggering the next and hopefully final leg down before people capitulate and then start to look through that. Well it is a theory at least, so I'd still say mind how you go out there for now and I'll try and do a fuller half year review next month. ​Rather than inflicting some music on you this time I'll leave you as promised above with a couple of videos featuring more from Ray Dalio (on his inflation outlook etc) & one he did with Jeremy Grantham last month, in case you haven't seen that.