The market spent the first three days of last week just shifting about in a bumpy, lethargic, generally downward-trending trading pattern, simply waiting it out for the main event in the form of the Consumer Price Index (CPI) inflation number release due on Thursday morning. There was certainly no sign that the buyers from the week before were looking to capitalize on their brief success and take any kind of control.
Even when the starter course arrived on Wednesday in the form of a slightly hotter-than-expected measure of wholesale inflation, the Producer Price Index (PPI), there was little reaction in advance of CPI, the main course. PPI climbed 0.4% in September after a 0.2% decline in August. Compared to a year earlier, the index was up 8.5%, down from 8.7% the previous month as energy prices eased. The Core number, which excludes food, energy and trade services, rose 0.4% month-on-month, but this was largely in line with expectations.
The reaction to the CPI release when it did come out the next day before the market opened was quite extraordinary. And ultimately baffling. Month-to month inflation from August to September rose by 0.4%, twice as quickly as the expected 0.2% pace. Compared to a year ago, prices were up 8.2%. Last month, that figure was 8.3%. Core inflation, which strips out food and energy costs, rose 0.6% in a month in September, unchanged from the August increase. This Core measure is now up 6.6% from a year ago and that’s the highest since Joan Jett shared with us all that she loved rock ‘n roll back in 1982.
The Fed is desperately trying to get inflation under control, but you wouldn’t know it from looking at those numbers. While energy prices are falling hard, inflation in services, shelter and transportation is still running seriously hot and even the notoriously free-spending American consumer is going to be facing some very hard choices as we head into the winter and holiday season.
Sometimes the stock and bond markets just do exactly what you expect them to. This was the case when the opening bell rang on the stock exchange an hour after the release of the CPI data. Interest rates skyrocketed, with the 10 year Treasury soaring above 4.07% at one point, territory not seen since 2008. Stocks swiftly crumbled to new 2022 lows again and well beyond. Within a couple of minutes of the open, the S&P 500 had dived over 2.5% and the NASDAQ was down by more than 3%. Things looked downright apocalyptic.
And then the strangest thing happened. As if by magic, everything suddenly turned around for no apparent reason. By 11:15am, all the day’s losses had been extinguished and things just carried on higher and higher, with both indexes ending the day well over 2% up from Wednesday’s close having round-tripped 5% intra-day. The last time the stock market bounced back that far from an intra-day decline of that size was in August 2011.
Finding a sensible reason for the abrupt turnaround, however, proved surprisingly tricky. All I could find were some rather unconvincing explanations like:
“Things have been miserable for while and we were due for a bounce”. If the indexes had finished lower on Thursday, they would have logged their longest losing streak since February 2020.
“Rent inflation may not be as bad as the CPI report showed”. Rents are factored into CPI on a lagging basis, meaning that the trend for shelter inflation might not actually be as awful as it appeared in the CPI report, since rent costs appear, anecdotally at least, to be moderating in real time.
“Inflation remained high, but no one was expecting it to be low”. If inflation causes the Fed to tighten monetary policy too much, it would eventually correct course by loosening monetary policy again. That would, in theory, be good news for stocks (this one I found to be particularly absurd).
“A technical bounce on the charts”. The initial price falls first thing in the morning hit some ancient trend-line drawn on some chart going back years and the market has a long memory.
Those all seem like poking around to find pennies in a fresh pile of cow dung to me, retro-fitting some tiny silver lining to a very large cloud. I could not find a single compelling reason given for the exceptional price spike and, believe me, I looked.
And so, while the champagne corks were popping on the New York Stock Exchange and giddy talk abounded that we had finally found “The Bottom”, a good number of us were just scratching our heads asking “WTF did we just see? And why?”
It took just 24 hours for this latest false start to be exposed as sham built on nothing. By the end of yet another ugly Friday, both the S&P 500 and the NASDAQ had had yet another losing week.
Beyond the CPI number, other factors also weighed on stocks last week. A number of Chinese cities moved to reimpose COVID lockdowns, but the main external culprit was across the pond.
Renewed turmoil in the UK government bond and currency market reached a crescendo on Friday after the Bank of England (BOE) refused to extend its program of stabilization through market intervention and British finance minister Kwarteng was summoned home early from Washington DC where he was meeting with his counterparts from around the world, only to be fired by a text from Prime Minister Liz Truss as soon as his plane landed, triggering a full blown political crisis to add to the financial chaos.
The global financial markets, the United Nations, the International Monetary Fund (IMF) (see EXPLAINER: FINANCIAL TERM OF THE WEEK), most of Britain’s leading economists, the bulk of Truss’ own rebelling party and the vast majority of the UK electorate had all already expressed varying degrees of despair and/or anger at the bizarro-world plan of apparently unfunded massive tax cuts announced by Kwarteng that now apparently threatens the financial stability of the fifth largest economy in the world and a blood sacrifice was required. The smart money has Truss gone by Christmas.
OTHER NEWS
Ugly .. The IMF cut its global economic growth forecast for next year, warning that “the worst is yet to come.” It reduced its 2023 outlook from a gain of 2.9% in July to 2.7% now, with a 25% probability it could fall below 2.0%. That’s the weakest estimate since 2001, except during the global financial crisis and the outbreak of COVID. The World Bank endorsed these miserable prognoses.
Having said that, the ARTICLE OF THE WEEK below emphasizes how rubbish people and organizations are at making predictions.
Nice bump, but .. About 66 million Social Security recipients will see their benefits rise 8.7% starting in January, the highest inflation-linked cost-of-living adjustment since 1981, but the soaring cost of food, rent and other essentials means it won’t stretch that far for most of them.
The average $1,656 retirement benefit will increase by $144.10. The standard Medicare Part B monthly premium will decrease by $5.20 for 2023, which will further boost the checks of recipients who get their premiums automatically deducted from their Social Security checks.
However, more of retirees’ income could be subject to federal income taxes. The IRS will soon announce the 2023 standard deduction and the inflation-adjusted dollar thresholds for each income tax bracket, which could eat into many retirees’ take-home.
UNDER THE HOOD:
The Percent of Stocks 30% or More Below One Year Highs is an important measure of the most beaten-down stocks. It not only shifted higher when the June-August bear market rally died, but it has since returned to levels worse than it recorded at the June 16th low. In other words, such low prices did not spark committed buying in this supposedly “on sale” area of the market. This is suggestive of a lack of desire to even nibble on stocks, let alone enthusiastically backing up any trucks.
The same conclusion can be drawn from the fact that 80% of all stocks are now below their 10-week moving averages, a historically extremely low level which usually triggers swift dip-buying, but there’s simply no sign of this right now. That is troubling as the longer these figures remain depressed without any sustained demand reaction, the more likely prices are to simply drift lower as buyers require even better bargains to overcome their doubts.
Since the expiration of this summer’s head-fake rally, the balance of Demand and Supply has materially weakened. In that time, Buying Power has resumed its long-term downtrend, hitting new bear market lows last week while conversely, Selling Pressure has turned meaningfully higher, Historically, such patterns are signs of a stock market that is highly vulnerable to further intermediate-term downside.
I could go on, but you get the picture ..
Anglia Advisors clients are welcome to reach out to me to discuss market conditions further.
THIS WEEK’S UPCOMING CALENDAR ..
Q3 earnings season really picks up this week, with more than 60 S&P 500 companies scheduled to report, including Netflix, Tesla, IBM, Johnson and Johnson, Goldman Sachs, Blackstone, Bank of America, Proctor and Gamble, American Express, Verizon, AT&T, Snap, Charles Schwab, American Airlines, Dow Chemical, Schlumberger, Lockheed Martin and Intuitive Surgical.
Lots of housing data out next week, the highlights being the Housing Market Index for October and Existing Home Sales for September.
US INVESTOR SENTIMENT LAST WEEK (outlook for the upcoming 6 months):
↑Bullish: 20% (down from 24% the previous week)
→Neutral: 24% (up from 21% the previous week)
↓Bearish: 56% (up from 55% the previous week)
Net Bull/Bear spread .. ↓Bearish by 36 (Bearish by 31 the previous week)
Source: American Association of Individual Investors (AAII).
For context: Long term averages: Bullish: 38% — Neutral: 32% — Bearish: 30% — Net Bull-Bear spread: Bullish by 8
The highest recorded percentage of AAII bearish sentiment was 70% and occurred on March 5, 2009 near the end of the financial crisis bear market. The lowest percentage of AAII bears was 6% on August 21, 1987 not long before the stock market crash of October 1987).
Weekly sentiment survey participants are usually polled on Tuesdays or Wednesdays.
LAST WEEK BY THE NUMBERS:
Last week’s market color from finviz.com
- Last week’s best performing US sector: Consumer Defensive (two biggest holdings: Proctor & Gamble, Pepsico) - up 1.6%
- Last week’s worst performing US sector: Consumer Cyclical (two biggest holdings: Amazon and Tesla) - down 4.2%
- The NASDAQ-100 materially underperformed the S&P 500
- While US Markets and International Developed Markets performed equally badly, Emerging Markets did much worse
- Small Cap stocks did better than Mid Cap stocks which in turn handily beat out Large Cap stocks
- Growth once again did substantially worse than Value
- The proprietary Lowry's measure for US Market Buying Power is currently at 131 and fell by by 14 points last week and that of US Market Selling Pressure is now at 189 and rose by 15 points over the course of the week.
- SPY, the S&P 500 ETF, remains below its 50-day and 90-day moving averages and well below its long term trend line. The 14-day Relative Strength Index (RSI) reading is 35**. SPY ended the week 25.1% below its all-time high (01/03/2022).
- QQQ, the NASDAQ-100 ETF, remains below its 50-day and 90-day moving averages and well below its long term trend line. The 14-day Relative Strength Index (RSI) reading is 33**. QQQ ended the week 35.5% below its all-time high (11/19/2021).
** RSI readings range from 0-100. Readings below 30 tend to indicate an over-sold condition, possibly primed for a technical rebound and above 70 are often considered over-bought, possibly primed for a technical decline.
- VIX, the commonly-accepted measure of anticipated upcoming stock market risk and volatility implied by S&P 500 index option trading (often referred to as the“fear index”) ended the week higher at 32.0. It remains above its 50-day and 90-day moving averages and well above its long term trend line.
ARTICLE OF THE WEEK:
We will soon be knee-deep in analysts’ confident projections of what the stock market will do next year. This article will hopefully convince you to tune out all this nonsense by showing that the forecasts of so-called “experts” have been absolutely useless since forever with, at best, the same predictive ability as a coin flip.
EXPLAINER: FINANCIAL TERM OF THE WEEK:
A weekly feature using information found on Investopedia to try to help explain Wall Street gobbledygook (may be edited at times for clarity) .
THE INTERNATIONAL MONETARY FUND (IMF)
The International Monetary Fund (IMF) is an international organization that provides financial assistance and advice to member countries and has become integral to the development of financial markets worldwide and the growth of developing countries.
The IMF came into formal existence in 1944 following the Bretton Woods Conference held the year before. Along with its sister organization, the World Bank, it was created to prevent economic crises such as the Great Depression. It is a specialized agency of the United Nations and is run by its 190 member countries. Membership is open to any country that conducts foreign policy and accepts the organization's statutes.
The IMF is responsible for the creation and maintenance of the international monetary system, the system by which international payments among countries take place. It provides a systematic mechanism for foreign exchange transactions in order to foster investment and promote balanced global economic trade.
To achieve these goals, the IMF focuses and advises on the macroeconomic policies of a country, which impacts its exchange rate, governmental budget, money, and credit management. The IMF will also appraise a country's financial sector and regulatory policies, as well as structural policies within the macroeconomy that relate to the labor market and employment.
In addition, as a fund, it may offer financial assistance to nations in need of correcting balance of payment discrepancies. The IMF is entrusted with nurturing economic growth and maintaining high levels of employment within countries.
The IMF is funded by quota subscriptions paid by member states. The size of each quota is determined by the size of each member's economy. The quota in turn determines the weight each country has within the IMF—and hence its voting rights—as well as how much financing it can receive from the IMF. Twenty-five percent of each country's quota is paid in the form of special drawing rights (SDRs), which are a claim on the freely usable currencies of IMF members.
The IMF offers its assistance in the form of surveillance, which it conducts on a yearly basis for individual countries, regions, and the global economy as a whole. However, a country may ask for financial assistance if it finds itself in an economic crisis, whether caused by a sudden shock to its economy or poor macroeconomic planning. A financial crisis will result in severe devaluation of the country's currency or a major depletion of the nation's foreign reserves. In return for the IMF's help, a country is usually required to embark on an IMF-monitored economic reform program, otherwise known as Structural Adjustment Programs (SAPs).
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