It has truly been an incredible first half with the S&P 500 up 15% and Nasdaq up 34%. Who would have thought in a year when the global central banks are raising rates, especially after the most aggressive rate rising campaign in history of markets, that the markets would be up in the 1H?
Although we need to caveat this as more than 80% of the year to date returns is made up by just a handful of stocks, the large caps like Apple (AAPL) , Amazon (AMZN) , Nvidia (NVDA) , Alphabet (GOOGL) , Microsoft (MSFT) and Meta (META) , etc. Small-caps or value stocks continue to be decimated, even though those are the ones being pushed by all the sell-side houses.
At the start of the year, the whole world was cheering for a China reopening rally. But it did not come to fruition as it was seen in the US and EU after their opening. China tried to stimulate the market by pumping in excess money in Q1, but that rally led to a surge in all commodities and equities, only to fizzle out and fall drastically over the past quarter.
The Issue With China
China's domestic consumer is in trouble and they are disillusioned, they do not and cannot spend. They are saving but China is also losing out as it is an export market and for now the US and EU, and the rest of world, is falling into a recession, and so China is getting hit too. China cannot alone save the world as we have not decoupled yet and China needs the rest of world as much as we need China.
Given its debt to GDP is about 300%, it has a massive balance sheet risk and the only thing it knows to do to promote growth is to print even more money. But how much more debt can it take on when the resulting growth does not last for long, making the consumer even more agnostic?
The massive rally in technology stocks has been aided by the Fed tampering with its quantitative tightening program as it was forced to add liquidity to the market in March, via its BTFP program. Let's call a spade a spade. The Fed had not really been doing QT.
After Nvidia reported blow out numbers and guided its quarter by 2x the revenues, the money rushed to all things AI related, which reminds us of Metaverse, Blockchain and all the other hypes, as much as they will be here to stay and possibly change the world no doubt, but to discount five years of earnings on day one with no margin for error makes a risky investment case.
Quality Is Quality for a Reason
It also reminds us of the dot.com boom when companies just threw in AI wording to get their stock price to go higher without any business rational! It is important to make a distinction but at the top, money starts going into all sorts of "laggard" stocks to play the move. Quality is quality for a reason, but chasing it for 5% yield when US government bonds give you more than that is debatable.
The long commodity trade is predicated on China reopening or recovering, whatever the rational is, but it depends on China coming back which it has not. China has been very smart to rely on its storage or demanding crude inventories to release more products, but the demand uptick that most imagined is nowhere to be seen. As the days go by, and China's data gets even more deflationary, the hopes of a 2H recovery look ever dimmer.
This is happening at a time when demand from the rest of the world is muted, it is not falling, but it is nowhere near rallying vs. supply that is growing much faster and from other sources.
OPEC+ is forced to makes more and more "voluntary" cuts. But how long will they be the sole supporters of oil, especially when all the other players benefit from selling more volume? One of the bull's main argument, lack of spare production capacity, is not an issue anymore.
China data this morning (Monday) showed a massive deflationary trend with CPI coming in 0% y/y almost negative. The PPI came in at -5.4% vs -4.6% seen in May. Perhaps the China recovering narrative will need to be revised. Well at least the commodity markets did not drink the same cool aid that equities have, but perhaps it's time for them, too, to pass over the punch bowl this time.