Recession fears strengthened

18th June – 24th June 2022 | Another week in the markets

S&P 500	Nasdaq	VIX	DJIA	Russell 1000	NYSE
3,911.74	11,607.62	27.23	31,500.68	2,149.71	14,811.55
6.45%	7.49%	-12.53%	5.39%	6.56%	5.07%
Nifty 50	Gold	Silver	Brent crude	USD-INR	EUR-INR
15,699.25	$1828.10	$21.13	$108.99	78.25	82.60
2.65%	-0.73%	-2.31%	-4.07%	0.38%	0.94%

Source: MarketWatch

Hello Saturday,

This week world stocks had their first weekly gain in a month, commodities saw steep declines, and recession fears strengthened.

• Federal Reserve to continue with rate hikes even if that leads to a recession 
• 34 major US banks pass the central bank’s annual stress test 
• Netflix in talks for advertising partnerships to roll out a new ad-supported plan for subscribers  
• FTSE Russell to finalise the annual rebalancing of its indexes 
• Copper prices fall by over 7%, another warning sign of a recession 

Taking stock | Contraction traction | Copper bottom | Stress tested OK | Adflix | Rebalancing act | Invest wisely

Taking stock 

Global and US stocks ended the week with sharp gains. The MSCI global index saw a weekly gain of 4.8% breaking out of its three-week streak of declines, and the S&P 500 saw its highest daily percentage increase since May 2020 at 3.1%. Dow Jones and Nasdaq also ended the week in green with a weekly gain of 5.39% and 7.49%, respectively. 

Contraction traction

Federal Reserve chair Jerome Powell said on Wednesday that the central bank would continue to raise interest rates even if that means a recession will be inevitable. However, stocks rose the next day as Powell emphasised the Fed’s commitment to slow inflation and sounded more optimistic about the economic outlook. The contractionary monetary policy of hiking interest rates makes borrowing expensive and reduces the supply of money in the economy. While this is effective in helping curb inflation, it also causes an economic slowdown. Currently, the inflation level in the US is around three times higher than the Fed’s targeted level of 2%, and global uncertainty due to Russia’s invasion of Ukraine and COVID-19 has only been making things worse. According to Powell, a 100 basis points (bps) increase is not off the table if the economic outlook warrants it. Economists expect to see a 75 bps increase in July’s policy meeting and a 50 bps hike in September. 

Copper bottom

Copper prices dropped to 16-month lows on Thursday. This is concerning because it’s another sign of the looming recession. Due to copper’s widespread applications in several fundamental sectors of the economy, copper prices are seen as a reliable indicator of economic health. There’s been a drop of over 7% in copper prices this week, and commodities overall have seen a sharp decline. 

Copper prices year-to-date: 

Source: Macrotrends

Stress tested OK

On Thursday, 34 of the largest US banks cleared the Federal Reserve’s annual health check. This annual ‘stress test’ was established after the 2007-2009 financial crisis to assess how the banks would fare in the event of a major economic downturn. The results determine how much capital banks need and how much they can pay to their shareholders. 

This year’s results revealed that the 34 lenders who have assets of over $100 billion would take a combined hit of $612 billion in losses in case of a hypothetical downturn. Despite this, they would have almost twice as much capital required to stay healthy. This means that all the major banks like JPMorgan Chase, Wells Fargo, Morgan Stanley, Bank of America, Goldman Sachs, Citigroup and more can use their excess capital to pay dividends and issue share buybacks. The test essentially assesses whether the banks would be able to stay above the required 4.5% capital ratio and the average capital ratio for the 34 banks came up to 9.7% this year. Stocks of banks that had the lower capital ratios in the group slipped in after trading hours. These included shares of Bank of America whose capital ratio was the lowest at 7.6% and Citigroup at 8.6%. 

Adflix

This week, Netflix co-CEO Ted Sarandos confirmed that the company is currently in talks with several potential advertising partners to roll out an ad-supported version of its streaming platform. Netflix reported a loss of 200,000 subscribers in the first quarter and has projected another decline of 2 million subscribers in the upcoming quarter. Hence, it is looking at offering a cheaper plan with ads to give a choice to the subscribers. Currently, Alphabet Inc’s Google and Comcast Corp’s NBCUniversal are the top contenders for this partnership. 

Rebalancing act 

FTSE Russell rebalances its indexes annually at the end of June to accurately reflect the broader markets, and its annual rebalancing this year will take effect from Monday. About $12 trillion is benchmarked to Russell’s US indexes. Hence, such rebalancing triggers fund managers who have benchmarked the performance of their portfolios to these indexes to make adjustments to ensure minimal tracking error. Stocks of companies such as Meta, Netflix, and PayPal that saw major price drops recently are to be now included in the Russell 1000 Value Index. This index includes those companies that are considered to be trading at a discount relative to their fundamentals. Since the start of 2022, the prices of Meta, Netflix, and Paypal stocks of dipped by 53.9%, 70%, and 62.6%, respectively. Hence, several value index-based ETFs are now going to include these stocks as well. 

Invest wisely

While a bear market means your portfolio may be in the red in the short term, it also presents a long-term investment opportunity. At a time like this, you can benefit from buying stocks of companies with good fundamentals at a discount and set your portfolio up for future gains. Download the Appreciate App to invest in a range of US value stocks and ETFs today.

Warm regards,
Another week
in the markets