Short Equities

We have been laying out the case for short equities for a while now, and today we enter a short equity position (see below for details). The rationale includes:

1. The Fed has a primary goal of bringing inflation down, and they will tolerate equity weakness. Therefore, there is the risk of the Fed tightening more than expected.
2. The odds of a US/global recession are increasing.
3. Europe is being hit by an energy shock while China’s domestic demand is hit by its zero-COVID strategy
4. With bond yields rising, equity earnings yield will need to pick up – this suggests more de-rating (i.e., lower p/e ratios, Chart 1). And with earnings growth likely to be impacted by weaker growth, equity prices are likely to fall.
5. Both US and European stocks are in the midst of drawdowns, but they could go further. The latest US drawdown reached a high of 13%, which ranks it as the 14^th worst since the mid-1960s (see Table 1). However, it has recouped some of that drawdown in recent weeks, and we have yet to see a 20% drawdown.

As for the trade, we go short an equally weighted basket of short S&P500 (ESM2, Jun22) and short Euro Stoxx (VGM2, Jun22). We start the trade in 50% of a unit and will look to scale up.

Bilal Hafeez is the CEO and Editor of Macro Hive. He spent over twenty years doing research at big banks – JPMorgan, Deutsche Bank, and Nomura, where he had various “Global Head” roles and did FX, rates and cross-markets research.

(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)