More investors are looking to reallocate assets in the second half of the year, as inflation numbers keep coming in above estimates, Fed action looks likely to be increasingly aggressive as times goes on, and the threat of recession seems to be lurking around every corner.
Jason Trennert, chairman and CEO of Strategas Research Partners, said, “The good news is a good portion of the multiple compression I think is behind us due to expectations for higher inflation. The bad news is that I’m not sure we’ve seen the earnings adjustment that people are anticipating.”
The S&P 500 is estimated to see a likely earnings growth in the second half of 4.1%, revised down from 5.9%, according to FactSet data. 4.1% would be the lowest growth rate since the fourth quarter of 2020.
FactSet data also indicates 71 companies in the S&P 500 have so far issued negative earnings per share guidance for Q2 of 2022.
Trennert said, “We’re more in the ‘soft landing’ camp, although history is not really on our side with that. It’s very hard for the Fed to pull off a soft landing once inflation has gotten away from it.”
In January, Trennert oversaw the launch of the Strategas Macro Thematic Opportunities ETF (SAMT). An actively managed fund, it will exploit exposure to multiple macro-market trends. Trennert noted, “We focus on what we think are the biggest drivers of stock price at any given time and do our own quantitative analysis to pick stocks to play those themes.”
The SAMT ETF’s four themes are, longer inflation, quantitative tightening, cyclical defensives and de-globalization.
Trennert explained, “In typical recessions, reported earnings fall about 30%. The good news is that you’ve got pretty tight labor markets, you’ve still got an easy Fed, and you’ve still got a lot of excess savings in terms of consumers and corporations.”
Even as the S&P has declined for the year, inflows into ETFs have continued as normal. In the week ended July 8th, $3 billion entered US-listed ETFs, which drove year to date inflows up to $311.1 billion.
Bruce Lavine, CEO of Nightshares, said, “That’s going to continue, the investors have spoken. The markets will be kind of shaky for a little while, but when they respond you’ll probably see record flows into ETFs.”
Meanwhile SAMT is loaded with commodity giants like petroleum and steel. But almost 3% of the ETF is in the US dollar, fresh off a 20 year high. Trennert noted that as the Federal Reserve moves aggressively to tackle inflation, it gives the US an advantage with respect to other nations whose central banks have not been as aggressive.
Trennert noted, “Certainly, the Bank of Japan and the ECB are way behind the United States. And they’re taking a big gamble, it seems to me. A weaker currency on their part helps their exports, but it provides a real risk to their consumers.”
