Resilient trades as U.S. economy faces looming recession
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While market analysts aren’t sure if a recession is coming, Dan Niles, the manager of a hedge fund, stated that there is no doubt the U.S. will experience one. A confluence between decades-high inflation, and what many believe will be an aggressive rate rise cycle has caused the U.S. to experience a severe economic crisis. The Federal Reserve’s Beige Book Report released last week shows that the U.S. has experienced only “slight to modest” growth in economic activity over the past couple of months. Recent warnings of a recession have been echoed by dozens of corporate executives. JPMorgan Chase CEO Jamie Dimon on Wednesday warned of an “economic hurricane” — an about-turn from his comments just a week ago that “storm clouds” over the economy may dissipate — while Citigroup CEO Jane Fraser said on Friday that the U.S. will have difficulty avoiding a recession. Niles goes further. Niles warns that oil prices are more than two times higher than the average over the last two years. “We have never managed to escape a recession.” While the prior average for oil prices over two years was $54 per barrel, it is currently at more than $110 [a barrel]. One point, the figure was over $120. CNBC’s Brian Williams said on Thursday that betting there is no recession means you are actually fighting the odds. Investors got a slight reprieve from a painful sell-off as the S & P 500 jumped 6.5% in the closing week of May, snapping a seven-week losing streak and posting its best week since November 2020. The bear market rally ended quickly as the three largest U.S. indexes finished the week in negative territory. Niles is convinced that inflation will continue to be a problem because of delays by the Fed in confronting it. “From a valuation perspective, right now the trailing P/E on the S & P 500 is about 20 times. The average trailing P/E was twelve times when CPI exceeded 5%. Even when CPI is above 3%, the average trailing P/E was 15 times so that’s why we feel like the S & P 500 is still going to go down [another 30% to 50%].” Analysts and investors use the price-to earnings ratio to determine the stock’s value. It measures current share prices relative to their earnings per share. High P/E can indicate that the stock is overvalued relative to its earnings. A low P/E could indicate that the stock’s current price is not as high relative to earnings. The P/E can also show how a stock’s valuation compares to its industry group or a benchmark like the S & P 500 index. “Before all this is done, sometime in 2023 when we’re looking down the face of recession combined with high inflation, and a Fed who’s forced be aggressive despite it, much like the 70s or early 80s. He said that this is unfortunate because it took so long for us to address inflation. Read more Hedge fund manager Dan Niles explains why we are still in a bear market rally These ‘margin leader’ stocks have strength in a recession, Jefferies says Wall Street veterans offer 3 trading strategies for investors worried about a recession ‘Don’t fight the Fed’ Niles’ advice to investors looking to trade the looming recession? “You don’t want to lose sight of the big picture and the big picture right now is don’t fight the Fed … right now, with inflation where it is, they’re your biggest enemy … and that ties into the second part, which is you do have a hurricane coming in terms of fundamentals and you don’t want to fight the fundamentals either because you’ve already gotten a negative GDP print in the first quarter,” he said. Investors should align their investment with current Fed monetary policy and not against it. Investors should be more aggressive when Fed interest rates drop, but less conservative when Fed raises rates. Niles is positive that consumer spending will continue to be resilient, despite the possibility of recession. While Target and Walmart had “huge” problems in the first quarter earnings season, he noted that higher-end retailers did well. U.S. retailers released mixed first-quarter results, including Target and Walmart missing their earnings estimates. They also warned of more inflationary pressures. Some retailers did well, like Macy’s. Nordstrom. Olaplex and Ralph Lauren. They also beat Wall Street estimates. Niles pointed out that the U.S. government’s pandemic-induced stimuli has resulted in about $2.5 trillion more savings than consumers will likely spend on services or reopening topics. The $2.5 trillion that is being spent will not be used, but the money will go further to entertainment, such as going to the movies. You’ll see an enormous shift in consumer spending away from goods and towards services. This will also include spending on vacations, leisure, vacations, vacation spots, airlines, etc. These are the main themes that I expect to make it,” said Niles. These sectors will not be spared from the effects of a recession, but Niles doesn’t expect them to. Niles said, “If they go into a very nasty recession they will feel it also, but this time I think they’ll feel less because of the spending show.”
Due to rising inflation, geopolitical tensions, and increasing recession risk, market volatility is on the rise. However, Wall Street banks offer a variety of stock pickings that can help them navigate the difficult backdrop.
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While market analysts are split on when and if a recession might be coming, Dan Niles (hedge fund manager) said that there is no doubt the U.S. will experience one.
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