Bilal Hafeez, CEO of Macro Hive, says the US stock market’s resilience in the face of ongoing economic weakness shows that investors are still not worried about an imminent recession, which could take place later this year or early 2024. Although the probability is quite high the US will enter a recession over the next 12 months, it’s the timing now that many are positioning for, with big tech and precious metals both acting as safe-haven plays since the October 2022 bottom. However, once layoffs begin to pick up in earnest and it is clear that a recession is upon us, Hafeez warned that this will likely have a negative impact on big tech stocks while presenting an opportunity for investors to accumulate shares in commodities and precious metals, which he believes have a number of longer-term macro tailwinds behind them.
Here's what he had to say in a recent must-listen interview on FS Insider (see Macro Hive's Bilal Hafeez on Big Tech, Hype Cycles, and Market Surprises for audio).
Manufacturing vs. Services
Hafeez explained that the economy has been experiencing a two-tier situation since reopening after COVID. The goods sector, which was turbocharged during the pandemic, has begun to shrink while the service sector has continued to thrive. He noted that certain sectors, like manufacturing, are already in recession, while other areas like services, restaurants, and the like are so far faring well.
This discrepancy in economic performance can also be seen in the stock market. Since the Silicon Valley bank failure in March, Wall Street is betting that the Fed is more likely to ease going forward, which will help bring down borrowing costs. This has significantly helped big tech stocks, which tend to benefit from lower yields. However, small caps, like the Russell 2000, have not experienced the same level of growth. Hafeez suggests that this is because smaller companies are more vulnerable, being more reliant on credit, which is less available, and tied to the US economy rather than the global economy.
Over the past year, banks have rapidly tightened up on lending, with bank tightening on commercial real estate loans near levels last seen during the 2020 Covid crash. This is worrisome for the overall economic outlook.
Hafeez's personal view is that the US is not currently in recessionary territory, but a recession could occur towards the end of the year or early 2024. This might explain why big tech isn't currently worried about an imminent recession. However, Hafeez believes that big tech could suffer from stickier inflation than the market currently anticipates, which may cause the Fed to not deliver the expected rate cuts Wall Street is hoping for.
Too Much Concentration
Hafeez also explained the high level of concentration of investments in the tech space, with enthusiasm and money flowing into big tech stocks exposed to the positive sentiment around the latest developments in artificial intelligence (AI), such as OpenAI's GPT technology. While these AI technologies are amazing and have significant potential, Hafeez cautions that there may be a hype cycle in play, with people potentially extrapolating too much from the current state of the technology when it comes to near-term economic growth.
Based on his own experience, Hafeez emphasizes that AI technology still requires a significant amount of human intervention to deliver meaningful value in business and client applications. This suggests that, while AI may be revolutionary, it may not yet be primed to make a significant impact on economic productivity or to help stave off the near-term risks of recession.
In addition, Hafeez says the financial sector is being disrupted by technology companies like Apple, which has partnered with Goldman Sachs to offer competitive interest rates on savings accounts. This shift is challenging the traditional business models of banks, especially regional ones, as technology companies become more involved in the plumbing of society and the economy. The concentration of power in a few large companies has advantages in terms of efficiency but also disadvantages due to lack of competition.
Longer-Term Macro Story Behind Commodities
From a macro perspective, Bilal is bullish on commodities, especially precious metals and oil. He sees the recent OPEC production cuts as a signal that they are willing to support oil prices and that Russian oil production will experience volatility due to maintenance. Bilal also sees increased demand from China’s ongoing reopening of their economy from last year. These factors, along with seasonality, could lead to higher oil prices, which in turn could put inflationary pressure on the economy, causing the Fed to maintain its tightening rate stance.
In conclusion, Hafeez highlights that there is a nuanced story within equities. Despite leading indicators signaling a potential recession, the stock market has so far remained resilient due to optimism in better-performing parts of the US economy along with slowing inflation and the decrease in rates. The high concentration of investments in the tech space, especially in AI technologies like OpenAI's GPT, may be driving a hype cycle that could disappoint investors if the technology does not deliver immediate results. Meanwhile, the disruption of the financial sector by big tech companies, such as Apple's partnership with Goldman Sachs, along with other challenges facing regional banks in the wake of the SVB and Signature Bank collapse, will continue to create uncertainty in the credit and lending space.
As investors navigate this complex economic landscape, it is essential to consider the various factors at play and to remain vigilant in the face of potential headwinds for a recession. Diversification across asset classes and monitoring macroeconomic indicators will be crucial for investors seeking to weather any storm that may be on the horizon.
To listen to this full audio interview, see Macro Hive's Bilal Hafeez on Big Tech, Hype Cycles, and Market Surprises or, if you’re not already a subscriber to our FS Insider podcast, click here to subscribe.
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