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Markets: "MayDay" or "May the 4th be with You"?

Mayday is an emergency procedure word used internationally as a distress signal in voice-procedure radio communications.

May 4, or, "May the 4th Be With You," marks a celebration of all things Star Wars attributed to famous phrase "May the Force be with You" used by Jedi Masters!

After dreadful month of Apr and worst start of year for Nasdaq ever, high-tech growth stocks are sending "Mayday" signal and hoping that some kind of Force would save them from daily pounding. It feels like dot.com bust all over again. Covid pandemic pulled forward growth of many high-flying stocks. Now that pandemic is over as worldwide issue despite spurts in Chinese cities and even in New York, investors are worried about lack of growth for once high-flying growth companies. Even "FANG" group is not spared. Many stocks are back to where they were before pandemic. For few of them, 5 years of gains got wiped out in last 5 months. 

So obvious question is - what's next?

Let's look at some macro and geo-political events which would continue to influence markets more than underlying earnings.

  • FED double-barrel shot at inflation - By all measures, Powell's Fed is behind the curve when it comes to dealing with inflation and lost some credibility. To restore it, Fed is going to be more aggressive than it used to be and reduce it's balance sheet and increase interest rates by 50 basis point for next 3-4 meetings. This time they won't have much sympathy to market tantrums. They would slow down only when inflation comes within their target range (2%) and economy does not enter into severe recession, That means days of EASY MONEY are GONE!
  • Russia-Ukraine (NATO) War - this is unfortunate and un-necessary war and it's very saddening to see so many lives are getting lost and families displaced. Unfortunately both sides are not willing to negotiate means war would go on for many months at minimum. This would put more pressure on commodities (Oil, gas, corn, wheat and so on) and hence inflation
  • COVID resurgence in China and elsewhere - this is micro-version of what happened in 2020 spring. After two years, world policy makers are better prepared to handle COVID. Since most of the world is vaccinated, there is no panic. It would definitely take a bite out of growth in China but if at all it would become positive catalyst for markets as China starts relaxing lockdowns.
  • Supply-chain bottlenecks - Supply chain bottlenecks would continue due to war, covid in China, labor shortage and so on. But as demand cools down, supply-demand may come into balance by end of year and could be another mini-catalyst both for inflation outlook and markets
  • Growth - Many high-growth companies have grown multi-fold due to pull forward of demand. Now they have to keep growing on  bigger numbers. That's difficult to do. That means growth premium built into stock valuations would have to compress. In many cases it has already happened after last 2 earnings seasons. P/S (price-to-sales) ratios have come down from 30-50 to under 10. For example: Roku, FB, PayPal, Spotify are trading at low single digit P/S ratios.
Markets go thru such normalization every few years as seen during 2011 and 2018. So 2022 would be like one of those years. Nasdaq is already down by 21% and S&P by 14%. After few more weeks of volatility both ways, markets should find footing late summer to get ready for holiday recovery. Indexes may end year with flat or single digit up or down compared to where they were at start of 2022. So if you are patient investor, best way is to do ETF investing on monthly basis. I am still sticking with my previous recommendation of XLE, XLK and XLF on regular basis. To keep it simple, you can just go for SPY.

May the 4th be with You!

/Shyam



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