US – Worrying Outlook | Harris Fraser
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21 June, 2022
US – Worrying Outlook

Although fundamentals remains unfavourable, global markets have slightly recovered this month, largely on the back of anticipated slowdown in monetary tightening, and the prospects of a soft landing lifted market sentiment.

Over the month of May, the Dow and S&P 500 slightly gained 0.04% and 0.01%, while the NASDAQ lost 2.05%.

For the long standing issue of inflation, markets expected inflationary pressures to ease, as reflected by the fall in the 5Y breakeven inflation rate. However, prices and cost of living remain elevated, which erodes the buying power of consumers. The consumer sentiment figures, which has hit a new record low, supports this view, household savings rate has also fallen below the longer term average. As consumption contributes to a large share of the US economic growth, weakness in consumption behaviour could have a material impact on the economy itself.

Although the Fed has been emphasising that the economy is looking at a ‘soft landing’, with the monetary policy tightening in all directions, the investment market suffers due to valuation compression, the reduced liquidity and increased interest rates puts extra burden on both business and consumers. Henceforth, recession is still a possible, further correction in equities cannot be ruled out. Our view on the US equity market has not changed, short term rebound is possible, but the medium term expectations stay gloomy. We will refrain from overweighing in the market until there is a more significant correction or if there are material changes in the external landscape.

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