Market Pulse: Rising chance of a soft-ish landing an opportunity for financials
June 8, 2022 | Anastasia Amoroso | iCapital
A combination of growth expectations remaining in positive territory, signs of inflation peaking, and the Fed’s apparent willingness to take a balanced approach to tightening collectively offer hope that we can avoid an economic crash landing. In this scenario, financials start to look like good value.
There has been relative calm in the markets lately. No one is particularly excited about chasing stocks higher near term given the precarious economic backdrop, but at the same time, no one is panicking about an imminent recession. The question is—is it a calm before a coming storm or could it last a while longer? We think the main reason for the relative peace of mind is a higher chance of a soft landing than previously perceived—and this could remain the case for weeks or even months. As a result, we see an opportunity in financial stocks as a cyclical trade that can perform as concerns about an end-of-cycle recession get pushed back and the benefits of rising rates ripple through into second quarter earnings.
A higher chance of avoiding a crash landing
What specifically has been giving the markets this peace of mind lately? Three things, all of which seem to show that, as narrow as a path is to a soft or “soft-ish” landing, there is a path.
First, growth is slowing but not falling off a cliff. Sure, GDP expectations have been revised down but they are not in negative territory yet. The 2022 consensus forecast is for growth to slow to 2.6% and fall marginally to 2.0% in 2023.1 And that might be precisely what is needed to cool the jobs market but avoid an outright contraction.
Second, there are signs that suggest inflation could be peaking. For one, this Friday the core Consumer Price Index is expected to come in at 5.9% in May vs 6.2% in April.2 Year-over-year wage growth cooled to 5.2% in May from 5.5% in April.3 The index of supply chain bottlenecks has shown definitive signs of easing and the return to relative normality in Shanghai should also help.4 Used car price growth is falling.5Lastly, businesses are finally flagging a pause in price rise intentions.6
(1) Source: Bloomberg, as of June 6, 2022.
(2) Source: Bloomberg, as of June 6, 2022.
(3) Source: Bloomberg, as of June 6, 2022.
(4) Source: Bloomberg, as of June 6, 2022.
(5) Source: Bloomberg, as of June 6, 2022.
(6) Source: Bloomberg, NFIB, as of June 6, 2022.
