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Capital 19 Catch-Up

Weekly Index Movement

S&P500+1.9%
Nasdaq+4.7%
Aussie All Ords+2.3%

A solid week for stocks was capped off by a very positive June jobs report. Which does kind of make things very confusing and leaves investors wondering just where they should put their funds.

US equities have seen a bounce so far this month, with the areas down the most YTD in the first half seeing the strongest moves off their recent lows

The landscape has changed and the market is now focused on a different fear.

The fear of recession.

That is why commodity companies like BHP have dropped 20% in the last 2 weeks.

But it is likely this fear unfounded.

It all started 2 weeks ago with some softish economic numbers from the US. They fed into the Atlanta Fed GDP Now model and this was the result.

GDP for Q1 was -1.6% so if this forecast of -2% is accurate for Q2 the US is already in a technical recession.

With a slowing economy (this is true regardless of the technical recession definition) those stocks that are sensitive to economic growth (commodities and consumer discretionary) get sold down.

On the flip side, with a slowing economy the Fed won’t need to lift rates as aggressively and if interest rates are not going as high as previously thought then the discounting factor for technology shares is less so they get bought.

And that is why we saw the Nasdaq as the best performing market last week.

However, the jobs report on Friday throws a spanner in the works. It came out very strong. The US economy added 40% more jobs than expected and wages have grown by 5.1%.

It is very hard to see a recession coming with such a strong labour market. Even if we do meet the technical definition of a recession with such a stong job market, consumers can spend their way out of it.

Now we are back to expecting another 75bps rise from the Fed when they meet later this month, which probably means tech stocks will sell off this week.

Confused as to which way to turn? Not surprising. Maybe this table will help.

The above is a general guide and you want to invest in the top right or bottom left corner depending on how it plays out.

Or – do a barbell strategy and add some positions from both sides. That would be our favoured approach.

Talking of favoured approach, look what has happened to our favourite energy sector recently

June was a nutty month for the Energy sector.  After surging all year as just about every other area of the equity market (and broader financial asset spectrum) imploded, the sector finally succumbed to the gravitational pull of the bear and cratered in the middle of the month falling more than 25%. At one point this week, in fact, Energy was trading further below its 52-week high than the Technology sector!  Late in the week, the Energy sector found support at its 200-day moving average (DMA).

Oil closed out the week back above $100/barrel and we still favour this market. Long term there just isn’t any new supply coming on and OPEC is either unable, or choosing not to, meet demand

Bull markets top out on maximum optimism. We don’t see a lot of optimism for the energy sector yet and still a fair amount of scepticism. We are still near the start of a multi-year bull market in energy and the market is giving you an opportunity to load up here at cheap prices. Don’t miss it

Staying on the subject of energy. Germany is in a lot of gas trouble. The government raised the country’s gas risk level to the “alarm” phase and we could well soon see the “emergency” stage.

Russia is about to turn a pipeline off for scheduled repairs but there is some concern they might not turn it back on. German consumers are facing the distinct possibility they might not be able to heat their houses.

The Ukrainian conflict has spurred European firms to lock in long-term LNG contracts, mainly with American providers. Electricité de France just issued a tender to purchase LNG starting in 2023, major US LNG provider Cheniere Energy greenlit the expansion of a terminal in Texas, Chevron struck two 20-year sales and purchase agreements with Venture Global LNG, and chemicals giant Ineos and German utility RWE separately announced LNG deals with Sempra Energy.

US LNG is already flowing to Europe in record volumes as prices in the region trump Asian rates, but it’s still not sufficient to meet demand. According to Bloomberg New Energy Finance, global LNG demand will increase by 18.4% by 2026 from 2021’s levels. That growth will be led by Europe, while the supply boost will come from the US. That means firms well-positioned in the booming LNG market – like Royal Dutch Shell (SHEL)Cheniere Energy (LNG), and Sempra Energy (SRE) – are set to benefit.

Here’s more reason to like this market from our friends at FactSet.

There are lots of colours and lines on this graph but what you are looking at is the various S&P500 sectors. The green bars are 10yr average PE ratios. The light blue is 5yr and the dark blue is present.

What caught our eye was Energy on the far right. That sector is trading on a PE of 8 when the 10year average PE is 15. These stocks can double in price and still only be at long-term average values.

Lastly this week we will leave you with some hope that things are starting to change.

The S&P remains in a well-defined downtrend with price currently trading towards the top of the channel. Bulls will want this downtrend to break if it gets tested soon.

Unlike the S&P 500, the Nasdaq 100 has managed to break above the top of its downtrend channel, which is due to the fact that it doesn’t have any real Energy or commodity exposure that has weighed on the S&P in recent weeks

The FANG stocks are down more from their highs than the S&P, but they’ve started to turn a corner with a series of higher lows over the past couple of months.

Divergences are occurring in some sectors of the market. This usually portends a shift. Maybe the bears don’t have a lot of energy (pun intended) left.

Warning

Stock values can go down as well as up. It is possible to lose 100% of your investment in a stock. Any advice given by Capital 19 is general advice only and does not take your personal circumstances into account.

Disclaimer: Capital 19 Pty Ltd ABN 17 124 264 366 AFSL 441891 (‘Capital 19’) believes the information contained is reliable, however, no warranty is given as to its accuracy and persons relying on this information do so at their own risk. This communication is for general information only and was prepared for multiple distributions and does not take account of the specific investment objectives of individual recipients and it may not be appropriate in all circumstances. Persons relying on this information should do so considering their specific investment objectives and financial situations. Any person considering action based on this communication must seek individual advice relevant to their circumstances and investment objectives. Subject to any liability which cannot be excluded under the relevant laws. Any opinions or forecasts reflect the judgment and assumptions of Capital 19 and its representatives based on information at the date of publication and may later change without notice. Any projections contained in this presentation are estimates only and may not be realised in the future. The investment manager certifies that all the views expressed in this document accurately reflect their views about the companies and securities referred to in this document and that their remuneration is not directly or indirectly related to the views. Capital 19, its directors, representatives, employees or related parties may have an interest in any of the companies and securities in this document and may earn revenue from the sale or purchase of any financial product referred to in this document or any advice. Past performance is not a reliable indicator of future performance. Unauthorised use, copying, distribution, replication, posting, transmitting, publication, display, or reproduction in whole or in part of the information contained in this document is prohibited without obtaining prior written permission from Capital 19.