Economic Stresses Now and to Come Make Most Equities Unappealing

The International Monetary Fund this week revised its projection for global growth downward to 3.6% for both 2022 and 2023. Those rates of growth, if realized, would be down steeply from the 6.1% level of global growth last year and from the 4.4% growth rate the IMF had expected for 2022 at the start of January. The war in Ukraine received much of the blame for the downward revision, which was understandable in light of the impact of the war on energy supplies and, more importantly, key inputs (fertilizer, wheat, corn, nutrients) in the global food chain. I am almost as concerned about the recent COVID lockdowns in China, which affects 400 million people to some extent in regions that account for 40% of that country's GDP. That can't be good for the global supply chain, which already has had multiple bottlenecks in recent quarters. Unfortunately, almost every economic trend is pointing down right now in terms of growth and pressure on the consumer. Take housing. The median selling price of a home is up 16.7% over the past year. Combined with the average 30-year mortgage rate rising to 5% from just over 3% a year ago, the average home now comes with a monthly payment that is 35% higher than it was 12 months ago. This rise in rates is a key reason home listings are starting to fall. Housing starts did rise unexpectedly this week. However, that was due solely to multifamily housing starts rising 7.5% on a year-over-year basis. Single-family housing starts fell 7%. This trend toward more multifamily construction makes perfect sense given that the average rent in the United States has risen 17% over the past 12 months according to Realtor.com and builders have better access to financing than individual homeowners. Obviously, this trend is a huge headwind to home builders and slightly less so to other parts of the housing sector, such as building supply distributors. Then we have the scourge of inflation with the Consumer Price Index up 8.5% over the past 12 months, the highest since 1981. Meanwhile, producer prices rose more than 11%. This means the average consumer has lost nearly three percentage points of their buying power over the past year thanks to surging prices, despite impressive wage gains. And that is if you believe government statistics fully capture inflation, which I don't. For commuters and those who rent, the situation is even more dire given the explosion of gasoline prices and big increases in rent compared to the same period a year ago. This stress is hardly unique to the United States. The U.K. just reported its worst monthly Misery Index reading in 30 years. Expect Misery Index along with stagflation to be two frequently used terms by economic pundits throughout 2022. The current economic environment is hardly one that supports an overall equity market still selling for about 20x forward S&P 500 earnings. It appears sell in May and go away arrived about six months early for investors this year. However, due to the huge selloff in some parts of the market so far in 2022, there are still opportunities in some of the oversold areas of equities. These are stocks that were thrown out with the bathwater as investors completely abandoned sectors of the market. I will profile a couple of these rare opportunities in the current market in my next column.

Economic Stresses Now and to Come Make Most Equities Unappealing

Reduced global growth expectations amid war, inflation and supply chain issues should give investors pause.

Columnist Conversation

This Weekend on Real Money

AAP Podcast: This Solar Company Is a Head-Turner

Very Cautious

COLUMNIST TWEETS

Please Join or Log In to manage and receive alerts.