CURRENTLY, I receive questions several times a day about how to manage investment portfolios and where the financial markets are headed. The first basic consideration in this regard depends on an investor’s individual situation, risk appetite, loss limits, own investment horizon, among others.
But, of course, I also have considerations about the direction of the financial markets. Overall, I see the direction can go either way, where the bullish view is that financial markets are currently undergoing a fairly heavy correction, which will continue to be painful for some time to come. The other direction is that the global economy is going completely black, and if this direction is trusted, then it is time to reduce the investment portfolio.
The correction that is contributing to the immediate sharp falls stems from the same forces that held together to cause the markets to jump sharply. Some will call them speculative moves; I choose to call them flow moves or flow corrections. Such moves create nervousness but are not necessarily an expression of fundamental imbalances, such as the moves that led Tesla to have a market value of $100,000 at the start of this year and which is now at $750 billion.
The large and fundamental correction is due to completely different macroeconomic forces. In short, I still see it as loose inflation because demand has been maintained for several years, while output/production has been reduced. I think this connection is understandable, but digging even deeper into the economies will also find several imbalances.
These imbalances appeared following the financial crisis and are mainly present in Europe. One example is how the European Central Bank (ECB) operated with such a low interest rate to create cheaper refinancing of Italian government debt. For several years before the Covid-19 pandemic, the ECB’s interest rate should have been around 3% instead of negative rates. It drove securities prices way too high, but also created abnormally low interest charges for households and businesses in Europe. At the same time, Europe chose to import cheap energy from Russia, where it would probably have been better to pay more and avoid the current dependency. All of these factors have contributed to artificially low inflation for years, and the risk is that even some of this saved inflation will be corrected for now.
All the factors I mentioned, from flow movements to a saved inflation correction, correspond to several risk curves coinciding at the same time (right now), which means adding the curves, this which can hopefully illustrate just how big these swings are created.
I consider myself optimistic, with the belief that the whole financial market is “only” in a major correction. This has the positive implication that there will be a dip somewhere in the market and there is life after the corrective phase – this belief will not be present if it is believed that the bottom cap has been removed from the global economy and it’s all about flushing out.
My main scenario is that there will be no good economic news for the rest of the year, maybe some good political developments, but it could be August or September at the earliest, if at all. From this point of view, it is too early to say when the financial markets will regain their footing, which is why everyone refrains from predicting when and where the correction could end, but I don’t mind sharing some thoughts, because this is something that I calculate very often lately.
With respect to US high yield corporate bonds, strong interest rate hikes by the US Federal Reserve have already priced in to the market, and to that I add inflation above the average in a few years to come, credit spreads, accompanied by a further rise in the US 10-year interest rate. He’s making the case for an even higher interest rate in the market, where my best bet is an additional 2 percentage points up to a 10% interest rate in the high-end US corporate bond asset class. yield.
Similarly, I’m going back and forth on various stock market factors, where my best bet is that the US S&P 500 stock index could fall another 15% to around 3,300. That should be considered my current forecast. on the low point of the actual correction, based on the factors that I know of at the moment.
Peter Lundgreen is the founding CEO of Lundgreen’s Capital. He is a professional investment adviser with over 30 years of experience and a powerful entrepreneur in investment and finance. Peter is an international columnist and speaker on topics relating to global financial markets.