Two prominent fund managers and stock pickers, Cathie Wood and Michael Burry finally agree that the US economy is entering into a recession due to weak consumer demand.
In an interview with CNBC's Squawk Box, CEO of Ark Invest ($ARK Innovation ETF(ARKK)$), Wood, said that "she thinks that the US is already in a recession" noting that excess inventory driving up costs and leading to wider-than-expected profit shortfalls for corporations like Walmart and Target is a “big problem” facing the economy. She warned that massive inventories which are often a leading indicator of demand have the potential to unwind growth amidst record-low consumer sentiment levels. Wood also admitted to being wrong about the duration of high inflation, believing it to be a “bigger problem” than last year's forecasts, given supply constraints exacerbated by Russia’s invasion of Ukraine.
Similarly, Burry, the founder of Scion Capital, warned that "the supply glut in retail is a result of the Bullwhip effect" and its disinflationary effect could lead to the Fed cutting interest rates and reversing its QT cycle at the end of this year. Burry claims that the stock market will bottom once investors swear that they will never own an NFT, cryptocurrency or technology stock ever again, referencing the 2000 dot-com crash, 1970s market crash and The Great Depression.
According to the Fed, there is "slightly more than a 50% chance of a recession over the next four quarters" and a two-thirds probability of a downturn over the next two years. While the odds of a recession have increased, US bank strategists at Goldman Sachs warned that corporate earnings have yet to be revised downwards to reflect this change. Data from Bloomberg Intelligence show they expect companies in the S&P 500 to see profits grow by 10.7% in 2022, while forecasts for US real GDP growth currently stand at 2-3%.
Where do we go from here?
Since the start of the year, the $S&P 500(.SPX)$ has fallen just over 20%, while the $NASDAQ(.IXIC)$ has fallen 30%. Jim Coulter, the founding partner and executive chairman of TPG, which manages $120 billion in investments believes that we are now in the "second chapter" of the bear market in which corporate earnings are revised downwards. The "first chapter" of the bear market is now over, with the market going through a multiple reset and high-flying tech companies correcting the most over the past few months. With supply chain disruptions, high energy costs and weak consumer demand expected to decimate corporate earnings, holding on to cash and selectively investing in "high value-add industries" and companies with pricing power is the most viable strategy, according to Coulter. Eventually, the "third chapter" of the bear market will begin, characterized by a period of fear, panic and distressed selling as investors "fear the worst is yet to come". Patient investors capitalize on the opportunity to buy shares of good companies at lower prices and benefit from the next bull market to come.
Disclaimer: This article is meant solely for informational and educational purposes and does not constitute investment advice. Perform your own due diligence before making any financial decisions.
Comments