“So who are the crazy people buying stocks?” is the title we use every time, since the beginning of the eighties, when the stock market enters a value correction. The last time we used this headline was during the sharp declines at the end of 2018, when the S&P and Nasdaq indices fell by 20.5% and 18.5%, respectively. The correction came as a result of investors’ fear of the Fed’s intention to tighten monetary policy through interest rate increases and liquidity absorption and no less scared of a war The trade opened by President Trump, between the US and China. To remind you, we will add that the big correction of 2018 happened amid rising employment and rising company profitability, does that remind you of something?
In 2018, the media (and my learned friends will forgive me there) raised the fear that the Chinese would sell their holdings in bonds and thus the American economy would be harmed – the same claim that was made when Japan became, in the 1980s, the largest holder of American bonds. This of course did not happen So, but this claim returned to the headlines at the end of 2018, in relation to China that if, in its anger at President Trump and his threats, it sells the package of US government bonds it owns, the US will enter a crisis.
China holds $980 billion in market value of the bonds at the end of the third quarter of 2022 – 3.2% of the total US debt (a bit behind Japan which not only did not sell anything but became the largest holder in April this year). True, China sold a tiny part of the holdings (just as the Japanese did in the late 80s) and dropped from 1.123 trillion at the end of 2018 to 980 billion but the danger that they will flood the market is nonsense. why?
The explanation that Governor Greenspan gave at the time, regarding the huge Japanese holdings, was, “Will they sell the package? To whom? The only buyer in the world is the United States, and it will buy at the price it decides.” Greenspan even encouraged the Chinese to continue buying American bonds, “China and Japan”. He said in the 1990s when he followed the Chinese’s big purchases, “They are, along with our central bank, the ‘strong hands'” and those who don’t understand why will investigate the matter.
Of course, the 2018 amendment, despite the images, was completely different from the current amendment. Then inflation did not soar as it did recently, nor was there a war in Europe and threats of invasion to Taiwan, and they did not even talk about problems in the supply chain, the climate situation then was not as worrying as it is today and certainly no one dreamed of Corona. But then, just like today, it was explained to investors that “2008 is back in a big way” and also in 2018 Professor Roubini returned to star in all the major networks with his warnings of doom.
It is of course important to listen to the professor who accurately predicted the 2008 crisis back in 2006, but also big investors like Ackman from Pershing, Dalio from Bridgewater or Carl Aiken predicted it in those days but with a “small” difference. The difference between the professor’s warnings and the warnings of such investors is that these three investors (and quite a few others) bought shares in Atref at the end of 2008 and also at the end of 2018 while warning of an “approaching 2008-style crisis” and in retrospect you will find that they are doing this even these days when they are warning of an approaching severe recession.
From a factual point of view, it is important to remember that the effect of wars, natural disasters or epidemics and everything related to them (black swans of various kinds) on stock indices, is only very short-term. What caused the market to turn around at the end of December 2018 and with unusual force (between the end of December 2018 and May 2019 the 2 indices rose by 31% and 25% respectively) was the increased profitability of the companies, the continuation of the tide in employment and consumption and most importantly the continuation of the merger and the fulfillment of the technological dream – these are the things that prevent the market from “crashing” in the face of all the threats imposed on investors.
All this introduction is not to say that the market is turning, not at all. The chance of continued declines is certainly still reasonable as is the chance of a turnaround that has supposedly been staring since the beginning of the month. But more and more investors (mainly Americans as we heard at the investor conference we were in New York) believe that the economy is not heading for a recession, certainly not a “heavy recession”. They believe that all the non-economic (political) factors that “helped” the current correction will disappear in the short term, inflation will die down and the Fed members will reverse policy.
This is because the number one cause of the falls, especially in the Nasdaq, was the prices (estimates) at the end of 2021, fading with the declines and the dream of the technology revolution just beginning so it’s time to collect reality and as is the custom of the Americans they prefer to return to the dream of the great disruption that is coming true and that led the markets in the last decade.
What Oppenheimer’s investment manager John Stoltzfus said this week reflects what we heard in New York last week; “Our view, regarding the shares, is bullish since (it seems to us) the shares of many solid companies have been sold, as a result of extreme negativity expressed in surveys of investment people and private investors and the daily volatility in the markets, excessively…”. Stoltzfus also cited two examples of oversold stocks, WIX
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and Amprius Technologies (NYSE:AMPX).
We know the latter very well, it entered the market using an existing skeleton and decreased by more than 50% this year. This is a company from California that manufactures and sells lithium-ion batteries with extremely high energy density for applications in the automotive industry, losing 3 dollars for every dollar of revenue (its revenue this year is less than 5 million).
Better-than-expected earnings reports from Corporate America appear to have helped fuel the sharp rally of the past few days. Now we have to wait and see if this will turn out to be another rise in the bear market or if the trend is really starting to change.
There are indeed many who are betting that the Federal Reserve may stop or reduce interest rate increases soon, but for now the central bank’s determination to lower inflation is clear and the increase in interest rates accompanied by the fear of a recession will probably continue to steer. Professor Jeremy Siegel of Wharton, who in our opinion and despite some mistakes in the past, is the leading expert in predictions on Wall Street, gave an interview to CNBC this week. He answered a question from a CNBC commentator about the implication of a potential 1.5% increase in the next two months (to above 4%).
In his opinion, the Fed should slow down the interest rate hikes, otherwise they will have to cut the interest rate sharply during 2023. “I would call for another 0.5% increase and stop to see the effect,” he said. The continuation of the sharp increases will, in his opinion, bring about a severe crisis in real estate, which, along with the declines in the value of other assets, will really cause a recession and a slowdown in consumption, employment, and investments. These things, in our opinion, reflect the investors’ belief that the Fed, despite the talk of a war on inflation, will stop to “rethink “.
The good news is that if history is any guide, the market will likely resume its upward trend long before inflation stabilizes at the 2%-3% desired by the central bank. Broadly speaking, high inflation is historically associated with lower stock returns with value stocks outperforming growth stocks during periods of high inflation and growth stocks tending to perform better during low inflation.
But always, when the central bank implemented an anti-inflationary strategy, the stocks started to recover long before the goal of the strategy was achieved. As an example, the last time the annual inflation rate reached 8% was in January 1982 and from there, it took almost a year and a half for the rate to drop below 3%. Stocks began to recover long before that, making annual gains from 1982 to 1989.
Opportunities that are created: the aviation and space sector
The aerospace market is expected to reach 1,047.07 billion dollars in 2026 compared to 700.3 billion in 2021 and approximately 756 billion this year. The growth in the aerospace and defense market is mainly due to the fact that the companies are reorganizing their activities and recovering from the impact of COVID-19.
The corona virus that led to restrictive containment measures that include social distancing, remote work and the closure of commercial activities that brought operational challenges. The aviation, space and defense market suffered a serious economic shock mainly from the corona closures but not only.
However, most market studies predict that the aerospace and defense market will recover from the shock and quickly because these are ‘black swan’ events that do not last long and are not related to weaknesses in the market or the global economy. On the contrary, the exit from the corona, the overcoming of the supply problems and especially the demands for technological developments following the war in Ukraine and the fear of an invasion of Taiwan guarantee a quick recovery.
The defense part will probably recover much faster than the commercial part because this part of the industry will benefit from massive budget increases following the geopolitical situation. The commercial aerospace sector was significantly affected by the pandemic resulting in a drastic reduction in passenger traffic, which in turn adversely affected the demand for aircraft. As a result, the commercial aerospace sector is expected to recover slowly as travel demand is expected to normalize to pre-COVID levels only during 2023.
As far as the investors are concerned and since the recession expectations continue to permeate the capital markets, they will look for the sectors that will be a safe haven sector to protect their capital. One of them will undoubtedly be the aerospace sector. It seems that the sector will go through a recession better than other sectors, what’s more, most of the leading companies are also in the “dividend stocks” category.
The year 2022, which was all about post-Covid recovery for the global aerospace and defense sector points to the future. Industry trends look much better, and the aerospace and defense sectors are expected to recover. All the studies we examined point to the aforementioned recovery.
So what do you invest in? And let’s start with a reminder, the increases we have seen recently do not foretell anything at the moment except hope that the central bank will “recalculate a course”, that profitability, employment and consumption will continue to surprise positively and that no more black swans will surprise. Anyone who decides to dip their feet in shares should do so in parts!!!
In the current situation it is better to concentrate on baskets or funds of the industry with an emphasis on the American industry, mainly the defense industry. Baskets like ITA or PPA, which are the 2 largest baskets that contain all the water and water in the industry and will benefit from the largest budgets and they also pay a dividend. For the more daring, there is the ARKX basket that invests in global companies engaged in space exploration and innovation and which has fallen by about 40% from the crazy highs of 2021.