There has rarely been any time that the maxim that the markets climb a “Wall of Worry” has rang truer.
Next week will mark the two-month anniversary of the Strait of Hormuz being effectively closed to most traffic. This has triggered a huge surge in energy and commodity prices and pushes the probability of a global recession up each week that this critical chokepoint is cut off. And this situation doesn’t depend on whether a ceasefire is extended, only on the restoration of normalization.
Higher gas, diesel and jet fuel prices will continue to push inflation and logistical costs higher. Twelve-month consumer inflation expectations jumped 100 basis points sequentially in March to 4.8%.
Private credit woes continue to mount, and commercial real estate loan delinquencies are rising, with the CMBS delinquency rate on office property pushing near 12%, higher than their peak during the Great Financial Crisis. Overall, the CRE CMBS delinquency rate is now north of 7.5%. It stood under 2% before Fed Chair Powell starting to lift the Fed Funds rate in March 2022, after nearly a year of articulating the surge in inflation was “temporary” and “transitionary.”
Delinquency rates on student, auto and credit-card loans continue to move higher as well. Job growth remains anemic and there have been more layoffs recently citing AI as the core reason behind these reductions in force. These include recent job-cut announcements at Meta Platforms (META) , Oracle (ORCL) , USPS, Amazon (AMZN) and Block (XYZ) .
Whether the majority of these job losses are directly tied to improving AI capabilities or to cover for over hiring following the Covid lockdowns is debatable. Oracle and Meta are reducing staff primarily to free up cash for their monstrous capital expenditures it appears.
Regardless, it is little wonder that consumer sentiment is at all-time lows. What is surprising is that markets are at all-time highs despite the misery of most of the consumer class. Weren’t we always told that two-thirds of GDP is driven by U.S. consumers?
Given this outlook, I am being quite selective in my stock selection and conservative with my portfolio allocation, which is up to nearly 30% in short-term Treasuries and cash after last Friday’s option expiration. I did put a slug of that cash to work during the recent five-week selloff in equities by initiating some additional covered call orders.
With the rally back to all-time highs, I am primarily focused on special situations such as knee-jerk reactions. I did this around Humana (HUM) and UnitedHealth Group (UNH) after big pullbacks in the stocks of these health insurers on government reimbursement fears, which later turned out to be somewhat overblown. UnitedHealth reported better-than-expected first-quarter results Tuesday, along with improved guidance and additional stock buyback authorization. UNH shares moved forward another 7% Wednesday.
In other words, my trading has been more limited the longer this rebound has extended. The market may continue to climb its Wall of Worry, but there are plenty of reasons to be legitimately concerned about valuations, rising inflation, delinquency rates, and the impacts to the global economy from the conflict in the Middle East.
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At the time of publication, Jensen was long AMZN, HUM and UNH.