Hi, I’m Adil Wali. I became a Microsoft certified professional at age 14, started my first web development company, and never looked back. Since then, I’ve been a founder, advisor, and investor to a number of startups in the world of fashion, e-commerce, and education technology.
July was a very positive month for the markets, meaningfully reversing the trend we saw in the first half of the year. The primary causal factors seemed to be:
- A 75bps rate increase from the Fed that was accompanied by what many perceived as a dovish pivot in tone.
- Corporate earnings that were not as bad as feared.
- A consensus belief that inflation is past the peak on a rate-of-change basis.
In our June letter, we started by noting the market doesn’t go up or down in a straight line. We also said that Bear market rallies can be equally as vicious as the downward moves. We went on to note three of the most likely shapes of the market for the back half of the year:
- The market having a vicious snapback rally and then resuming its trend downward.
- The market chopping sideways for a while before continuing to trend down.
- The bottom being in for this bear market and a resumption of the bull trend.
So far, path (B) has been taken off the table, leaving us with paths (A) and (C) still in play. Our Macro model is starting to show a progressively increasing likelihood that Option C could come to pass. From a macro forces perspective, this has been one of the most uncertain times we’ve seen in recent memory.
Let’s look at the reasons to consider that the bottom could be in (Path C):
- The aggressiveness of the rally in July suggested that there was both a lot of short-covering and that a meaningful amount of cash was on the sideline. If there’s more shorting to cover and more cash on the sidelines, then we should rally meaningfully further.
- The Fed does seem to want to do an about-face, even if that’s not the right thing to do for inflation.
- An easing of the tensions in the Ukraine could meaningfully bring Oil (and thereby the inflation basket) down.
The reasons to consider that we have another leg down to come (Path A):
- Companies across the size spectrum have begun layoffs and slowed hiring, creating what could be a self-fulfilling economic prophecy.
- Wage inflation is likely to be stickier than any of the baseline commodities or physical goods that are key inputs.
- Geopolitics could ratchet up and get worse, such as Russia holding out natural gas from Europe and plunging Europe into a deep recession that will have spillover effects.
If the uncertainty that we currently feel manifests in the markets in the near-term, we may end up having to choose between our market bottom call of SPX 3250 and our EOY target of SPX 4450. While we (really) don’t want to make that call right now, we believe that having a hypothesis is important, even if uncomfortable. So, if pressed, we’d choose the downside target over the EOY target. Our primary reasoning comes down to how few times the Fed has actually historically engineered a soft landing in the past. And despite market pundits increasingly calling for the bottom being in, we have a hard time understanding just how inflation comes in check without a substantial amount of demand destruction.
Disclaimer: Adil.io does not provide, and no portion of our Content purports to be, individualized or specific investment advice and Adil.io does not provide investment advice to individuals. All information provided by Adil.io is general in nature and is made without regard to individual levels of sophistication or investment experience, investment preferences, objectives or risk parameters and without regard to the suitability of the Content for individuals or entities who may access it. No information provided by Adil.io should be construed as an offer to sell, or a solicitation of an offer to buy any security or investment vehicle, nor should it be construed as tailored or specific to you, or any reader or consumer thereof. You understand and agree that our content does not constitute specific recommendations of any particular investment, security, portfolio, transaction or strategy, nor does it recommend any specific course of action is suitable for any specific person or entity or group of persons or entities. Adil.io research Content is based upon information from sources believed to be reliable. Adil.io is not responsible for errors, inaccuracies or omissions of information; nor is it responsible for the accuracy or authenticity of the information upon which it relies.