With 2022 already providing too many fireworks, could there be anything left to surprise the markets? Over the past few months, I’ve written a fair amount about the current macro risks to equities, ranging from rampant inflation to the ongoing war in Ukraine. Absent some new, incendiary headline, could it be that this current inflection point could be a sign that the markets are finally pricing in all the swirling negativity?
Whatever the answers may be, it is a fact that the mood among investors is shifting. In China, the government has signaled that it may soon ease its zero-COVID policy to enable a return to business as usual just as regulators are taking a noticeable step back—a combination that is adding fuel to the bull case in some regions of the world. In parallel, a hectic and painful month across the markets has stoked a growing lack of trust among market participants. Whether investors are questioning the Fed’s wisdom in raising rates, suffering from the instability of Cryptocurrency, or losing faith in the ability of corporates to achieve buoyant guides into the rest of the year, they have certainly been left with far more questions than answers as of late.
The result of this confluence of issues was another down month in every corner of the market, including the ROBO Global indices. For the month of June, the ROBO Global Healthcare Technology and Innovation ETF (HTEC) declined -4.26%, the ROBO Global Robotics and Automation Index ETF (ROBO) fell -11.39%, and the Robo Global Artificial Intelligence ETF (THNQ) dropped -8.79%.1
Surprises are the nemesis of the markets, and there have been far too many of late. Inflation flew through the roof, caused at least in part by lingering supply chain pressures. The escalation and continuation of the war in Ukraine, plus the subsequent commodity shock, created more pressure. Then came the Fed’s response—another surprise!—which took us from expecting the first interest rate hike to come in 2023, to feeling the pain of multiple hits in a matter of months to deliver the most dramatic uptick in three decades. There is little argument that the decision to raise rates was warranted. The cracks have already begun to form, with consumer sentiment at all-time lows2 and more companies announcing job cuts and slowing hiring plans.
The bull perspective (mine included) is that this may be the moment we have long been waiting for: the Fed is finally playing offense. At the margin, Powell may be able to reel inflation back in before we see growth slow down broadly. For investors in particular, the new tightening is serving as a much-needed clearing event for equities. Even better, it looks like the Fed’s strategy may already be beginning to have an impact. May data for core Personal Consumption Expenditures inflation—the inflation benchmark the Fed watches most closely—came in at 4.7% year-over-year, beating the consensus estimate for 4.8%. This is the third month in a row for sequential declines since the peak in February at 5.31%, and this measure of inflation is coming down as quickly as it went up; the May reading is the lowest since October. Trend Macro’s monetarist model predicts that this key measure of inflation will be at 1.95% in June 2023—below the Fed’s target. This is based on a 13-month lag to year-over-year M2 money supply growth, which has fallen sharply from its peak in February 2021 with the cessation of new federal stimulus programs.3
Does that mean our troubles will be behind us soon? Not quite. We are living in a bipolar economy, with a traditional economy at one end and an autonomous economy at the other. The former is prone to inflation, while the latter is prone to deflation. Though it will take some time, the autonomous economy is rewriting the economic rules. Labor shortages, supply chain issues, and margin are plaguing nearly every industry, and the only clear way out of the mess may be for companies to adopt technology and automation. At the same time, we believe the down market is giving investors an opportunity to consider the companies that deliver these much-needed technologies at a discount. It’s shaping up to be a future-focused investor’s perfect summer storm.
1 ROBO Global®, S&P CapitalIQ, For standardized performance data current to the most recent month end, please visit www.roboglobaletfs.com.
2 University of Michigan's consumer sentiment index, June 24, 2022
3 Trend Macro
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