Weekly Market Recap – July 25th

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Sign of relief for inflation?

Shipping costs, which had surged and helped increase inflation amid virus- fueled bottlenecks and a shortage of containers, are slowly approaching pre- pandemic levels. Port congestion in Southern California lessened, with the backup declining to 24 ships from January’s peak of 109. Rates should continue to moderate as supply-chain constraints ease and global demand weakens

Source: Drewry Shipping Consultants, Bloomberg

50 bps has become the new consensus

Some 70 central banks have hiked interest rates by a half-point or more in one move this year, with the European Central Bank and its Danish counterpart becoming the latest members of that club on Thursday. More than half — including the US Federal Reserve — have been even bolder and raised borrowing costs by at least 75 basis points in one go in order to fight surging consumer prices.

Source: Bloomberg

Home inventories on the rise.

Inventories of US existing homes had trended down for the last several years — reaching record lows in January — but that has begun to reverse, with available properties climbing 15% in June from a year earlier and rising rapidly in Denver, Austin, Phoenix and Nashville. The shift is likely to soften home prices should demand remain weak, particularly in markets that logged outsize gains since the early days of pandemic.

Source: Bloomberg

Valuations are cheap statistically speaking

Absolute and relative multiples are below key averages in the financials sector and lack any impetus to improve, as the inverted yield curve and specter of recession keep a lid on valuations. The sector trades at 11.2x year-ahead EPS, 1.5 standard deviations below its five-year average and the fourth-lowest Z-score among index sectors after materials, communications and real estate. Relative to the S&P 500, the sector is 0.9 standard deviations cheap to its pre- pandemic five-year average.

Buybacks for many big banks might pause as they look to meet capital requirements. Likewise, a recession could disrupt dividend and buyback schedules, removing even more of the sector’s allure.

Source: Bloomberg Intelligence

The 60/40 Portfolio isn’t dead

The classic 60/40 portfolio, where investments are split 60% in stocks and 40% in bonds, is “merely resting and isn’t dead”, Morgan Stanley’s chief cross-asset strategist said, after the strategy had its deepest first-half dive since 1988.

However, the strategist argued that even if stocks and bonds are now positively correlated, there are still plenty of days when the two asset classes don’t move together. He also considers that bonds remain good diversifiers, even if less so than before.

Source: Bloomberg, Morgan Stanley