04 Jul Recession, a Soft Landing, or Both?
Market decline in the 1H of 2022 was the sharpest since 1970. Inflation, rising interest rates, recession; need I say more.
Having said that, where are we heading?
I will share with you a few thoughts on the matter, and my personal view:
The biggest “black swan” contributor to inflation has been the Russian invasion of Ukraine, and the resulting spike in prices of commodities. It has been a true geopolitical calamity with many lost lives, refugees, and destruction; however, from the market’s perspective, I believe the world will adjust, as there are ample means of production (namely for fuel & wheat) in the US alone.
The crisis in Ukraine came on the heels of pandemic related supply chain disruptions in China, which led to shortages in several industries, such as the auto industry. All this has led to sky-high CPI numbers.
The Fed has increased interest rates three times so far this year, and the question on everyone’s mind is, how many more interest rate hikes are in store, and can the Fed navigate the economy towards a soft landing?
The US consumer is undoubtedly facing more headwinds; higher fuel, food, and mortgage costs translate to weakened spending power. The magnitude of this is yet unknown and being monitored daily by macro analysts and investment managers alike.
On the flip side, innovation continues to drive the economy and create lasting value for shareholders. Two names that come to mind are Apple and Unity Software. Apple needs no introduction; the company’s ability to leverage its platform to more use cases is worth noting. One recent example is “Buy Now, Pay Later”; we continue to follow for future metaverse-related developments. Likewise, but on a smaller scale, Unity Software provides a platform for real-time content creation, applicable in auto design and architecture, as well as gaming and film. Looking ahead, I believe that long term shareholder value is continuously being created, and that the big picture is sometimes lost on investors.
My view is that the market is currently overestimating and overpricing risk. While there are always the pundits who claim that “the sky is falling”, there are also many rational voices who agree with my view. One of my personal favorites, Ron Baron, calls this a “once in a generation opportunity”.
Irit Jakoby is Co-Founder and Director at Defender Funds, a hedge fund investing in US markets.
Dedicated on my son Mattan, whose analytical skills don’t cease to impress, and challenge me.