To The Moon

Over the past week, the S&P 500 ($SPDR S&P 500 ETF Trust(SPY)$) lost 1.9% in value, despite a 6.4% week-on-week rise in the previous week. As last Monday's article predicted, this rise was predominantly limited to a single day’s rally (on Friday) and was likely due to deeply oversold positions. There were likely some opportunistic bets made that overall sentiment would continue to be bullish. This didn’t pan out and there is some expectation that the market will remain bearish in the current week, with some rallying on Friday.

Overall, in the first half of this year, the S&P 500’s performance was the worst since 1970 – which it barely squeaked past. Since 1957, in the years when the S&P 500 had a negative first half, the benchmark had a negative second half about 50% of the time.

What might tilt this trend to be more likely for the rest of the year would be the outlook on the broader U.S. economy. Expectations of U.S. first-quarter GDP growth rate facing a 1.5% contraction were unmet; the actual number worked out to be 1.6%. The Atlanta Fed’s "GDPNow" gauge estimates the second-quarter running at negative 2.1%. In technical terms, this confirms that the U.S. is already in a recession.

Real estate was one strong haven for investors in this year as concerns over inflation grew stronger. In the U.S., the ratio between the average new home price and disposable income were at all-time highs last week.

Over in Europe, Eurozone inflation rates surged to 8.6% in June, which is up from 8.1% in May. This is a fresh record by surpassing expectations of 8.5%. This indicates an increasing squeeze on households across the Eurozone, with France, Italy and Spain reporting new all-time high highs this past week. Unsurprisingly, this is strengthening calls for an aggressive rate hike by the European Central Bank.

The yield on 10-year US Treasury bonds rose 0.08 percentage points to 2.92% while the yield of the 2-year bonds – considered more sensitive – climbed 0.12 percentage points to 2.66%. This is in expectation that central banks would attempt to combat inflation more aggressively. As yields increase, prices fall. Given that the U.S. and Eurozone have a heavy presence in the global government bond markets worldwide, the total government bond market is projected to have the worst returns over the past 150 years.

In the U.S. equity market, “tech” – a long-standing mainstay of investor preferences over the past couple of decades – has seen the worst performance over the past six months. Only healthcare and energy stocks show a net outperformance.

In the middle of last month, coverage of the GPU-centric $NVIDIA Corp(NVDA)$ and the CPU-centric $AMD(AMD)$ had mentioned how a fadeout in overall growth outlook make these overvalued stocks particularly vulnerable. In the first half of the year, both had lost nearly half their value. In the past week alone, NVIDIA plummeted by 13.9% while AMD was down by 14.5%.

Over in the oil market, the overall trend seen through most of the past month (which was also covered) continued in the past week: US Oil slid by 1.5% – a rate commensurate with the decline in the S&P 500. This also confirms the broad outlook on energy consumption: with inflation rising, many households in the Western Hemisphere will be reducing their energy consumption somehow. Given the fall in energy prices and the market – along with the increasing expectation of rate hikes – there is very strong argument that the recessionary phase of the inflation/recession cycle has already, in fact, begun.

In Conclusion

While the US markets are showing very strong bearish trends, overnight trading - which covers Asian and European spaces and investors operating there - tend to show relentlessly bullish trends:

As seen, these trends do not deliver positive gains.While U.S. equities do tend to get a lot of attention worldwide, what also bears noting that this trend by Asian and European players have rarely panned out to their benefit over the long run (or even the mid-term run). 

For Asian investors, many brokers (including Tiger) offer a host of leveraged inverse products underpinning most high-conviction U.S. stocks, broad indices and commodities that are currently manifesting a very strong use case with the potential realize short-term gains over the course of a week or even longer. With adversity comes opportunity and this is certainly true for the pragmatic and disciplined investor.