How quickly that half-full glass I talked about last week has emptied. A third consecutive week of stock market losses ended with a thousand point fall in the Dow Jones Industrial Average on Friday as Federal Reserve chair Jerome Powell, talking at the Fed’s annual jamboree in Jackson Hole, Wyoming, ferociously doubled down on the central bank’s commitment to raise interest rates as aggressively as is needed to bring current high inflation levels back down towards the target level of 2%. I’ll come back to this later.
The durable goods report for July was disappointing, which may have been a good thing since all economic data is now viewed through the lens of “What will it make the Fed do?” and it suggested a welcome slowing of demand which could throw a little cold water on inflation and thereby reduced risk of greater interest rate rises. It showed new orders for big ticket items were virtually unchanged last month. Economists had expected a 0.5% increase after June's 2.2% gain.
The same can be said of the release of US and European Purchasing Managers’ Indexes (a monthly survey of supply chain managers across all industries which measures the prevailing direction of economic trends in manufacturing). The results were disappointing relative to analyst expectations and indicate an economic slowdown, thereby potentially reducing the need for outsized interest rate hikes.
Evidence of this slowdown is locked in combat, however, with increasingly hawkish (i.e. more inclined to raise interest rates) Fed-speak as Fed presidents continue to weaponize their words, literally yelling at the stock market that it was being way too over-optimistic.
The idea that Powell’s speech would be a happy-clappy celebration of the recent apparent stalling of inflation and that he would begin to ease the rhetoric on interest rate hikes started to recede early in the week as the consensus began to shift to the (ultimately accurate) position that in fact the Fed would be striking a more hawkish tone on Friday to combat recent market exuberance and continuing resilient labor market conditions and stock prices began to tumble in anticipation.
Obviously, the Saudis weren’t particularly listening during Biden’s recent visit as their energy minister last week suggested OPEC+ nations may now cut production to keep prices high. The price of oil duly spiked, which is mostly bad news for stocks not in the energy sector.
Going into Friday’s speech, the futures market bet on the likelihood of a three-quarter point rate hike rather than a half point at the September 20th/21st meeting started shifting back to a probability of over 50%.
Which brings us back to Powell’s words on Friday which spooked investors so badly. The market’s gut feelings that a nasty Fed Friday surprise was brewing proved to be correct. J.P. was uncommonly succinct and direct, aiming to convey nothing but steely resolve in the central bank's efforts to bring down inflation. He suggested recent inflation results that show cooling prices were much too small a sample size to affect Fed policy yet.
His key words were; "While higher interest rates, slower growth, and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses. These are the unfortunate costs of reducing inflation. But a failure to restore price stability would mean far greater pain."
He hit back at the bizarre Wall Street narrative that somehow built up recently that the Fed may start cutting rates again next year. He talked about a “sustained period” of low growth and higher interest rates and even specifically said that"the historical record cautions strongly against prematurely loosening policy [i.e. cutting interest rates]".
This flawed rate-cut story that Wall Street had concocted, based on absolutely nothing as far as I could see, is behind at least a part of the significant rally we have seen since mid-June. Now that’s off the table, it was inevitable that the market would have a tantrum on Friday as it tends to do whenever anyone takes one of its toys away.
As I have mentioned many times, the viability and continuation of the June-to-August rally depends on the feel-good vibes that have driven it actually being grounded in reality. Cracks are appearing in that whole narrative and markets are now taking back many of those gains, effectively pleading guilty to the Fed’s charges of recent over-optimism.
OTHER NEWS:
Student loan debt cancellation .. I sent out a special edition of Angles to all subscribers on Thursday immediately following the announcement with a summary of what we know so far.
Cute little money pits .. The Brookings Institute determined that an average married, middle-income couple with two children would spend $310,600 - an average of $18,271 per year (after tax obviously) to raise just their younger child born in 2015 through age 17. The estimate covers a range of expenses, including housing, food, clothing, healthcare and child care, and accounts for childhood milestones and activities, diapers, haircuts, sports equipment and dance lessons, among many other costs.
The calculation uses an earlier government estimate as a baseline, with adjustments for inflation trends. The total has increased by over $26k - or more than 9% - since the previous calculation in 2020.
Like a bad movie? .. Shares of legendary meme-stock and Reddit crowd fave AMC Entertainment Holdings (AMC) plunged on Monday as a rival theater operator said it is considering bankruptcy, prompting CEO Adam Aron to issue an upbeat, “nothing to see here” statement. On August 16th, AMC stock reached almost $23. On Friday, it closed just above $9.
However, it should be noted that the apparent price crash coincided with the debut listing of AMC’s preferred shares (preferred ticker symbol APE) on the New York Stock Exchange, distributed to shareholders instead of a dividend - so in fact the value of a shareholder’s holding is the aggregate of AMC and APE, something mostly overlooked by financial headline writers heralding the AMC price fall as a total catastrophe without due consideration of APE.
Earlier, British-based Cineworld, the world’s second-largest theater chain and operator of Regal Cinemas in the US, was undergoing a genuine catastrophe. It confirmed that it will likely file for Chapter 11 bankruptcy protection (see EXPLAINER: FINANCIAL TERM OF THE WEEK below) as it tries to restructure its gruesome-looking balance sheet.
Cineworld blamed a lack of blockbuster movies and residual effects of COVID-19 lockdowns on theater attendance for an explosion of debt, which it put at $8.9 billion at the end of 2021.
GDP saga part 2 .. The Commerce Department reported the revised second of three estimates of Gross Domestic Product (GDP) showing a 0.6% fall in Q2, down from the first estimate of 0.9% that caused such a flap at the end of last month.
Economists had expected the second estimate to show a decline of 0.8%. We now await the third revised estimate, which will determine what GDP number for Q2 2022 will actually go into the history books.
UNDER THE HOOD:
Short-term overbought readings began to take their toll, as stocks pulled back to digest their gains. Overbought conditions in and of themselves are not sell signals. They set the stage, but require some sort of spark to bring out pent-up selling.
The viability and extent of this spark is far more interesting than what caused the overbought conditions in the first place, which can be just the simple attainment of the 200-day moving average (200 DMA) by the major indexes (more on this below), extended valuations after a mostly uninterrupted period of gains or a troublesome word from the Federal Reserve (all of which have been in play for the last week or two). The reaction that set in on August 19th has seen a number of days of pretty intense selling, not least on Friday.
In May 2008, a market recovery stalled right at its 200 DMA. The S&P 500 then went on to fall another 53% before bottoming out almost a year later. Similarly, the bear market of 2000–2002 saw several failed breakout attempts above the 200 DMA that ultimately resolved in a peak-to-trough decline of 49%. Okay, it’s certainly true out that most rallies that fail at the 200 DMA do not turn into a 2001 or 2008. However, while it remains to be seen whether the rally from the lows of June 16th resumes or fizzles, a substantial pullback from here still remains a real risk.
Anglia Advisors clients are welcome to reach out to me to discuss market conditions further.
THIS WEEK’S UPCOMING CALENDAR ..
A few more S&P 500 companies remain to report their Q2 results next week, including Hewlett Packard, Baidu, Best Buy, Broadcom, Campbell Soup, Lululemon and Chewy.
The main event on the economic calendar will be Friday's release of the August employment report. Economists on average are forecasting a gain of 270k jobs, and for the unemployment rate to remain unchanged at 3.5%.
Other data out next week will include the Job Openings and Labor Turnover Survey (JOLTS) for July, the Case-Shiller National Home Price Index for June, and the Consumer Confidence Index for August.
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US INVESTOR SENTIMENT LAST WEEK (outlook for the upcoming 6 months):
↑Bullish: 33% (unchanged from 33% the previous week)
→Neutral: 30% (unchanged from 30% the previous week)
↓Bearish: 37% (unchanged from 37% the previous week)
Net Bull/Bear spread .. ↓Bearish by 4 (Bearish by 4 the previous week)
Long term averages: Bullish: 38% — Neutral: 32% — Bearish: 30% — Net Bull-Bear spread: Bullish by 8
Weekly sentiment survey participants are usually polled on Tuesdays or Wednesdays
Source: American Association of Individual Investors (AAII).
LAST WEEK BY THE NUMBERS:
finviz.com
- Last week’s best performing US sector: Energy (two biggest holdings: Exxon-Mobil, Chevron) - up 3.9%
- Last week’s worst performing US sector: Technology (two biggest holdings: Apple, Microsoft) - down 5.8%
- The NASDAQ-100 fell further than the S&P 500
- US Markets fell by much more than International Developed Markets and Emerging Markets
- Not much in it, but Large Cap stocks underperformed both Mid and Small Cap
- Growth stocks performed far worse than Value
- The proprietary Lowry's measure for US Market Buying Power is currently at 176 and fell by 6 points last week and that of US Market Selling Pressure is now at 148 and fell by 1 point over the course of the week.
- SPY, the S&P 500 ETF, is now back below both its 50-day and 90-day moving averages and still well below its long term trend line. The 14-day Relative Strength Index (RSI) reading is 44**. SPY ended the week 15.2% below its all-time high (01/03/2022).
- QQQ, the NASDAQ-100 ETF, is now back below both its 50-day and 90-day moving averages and still well below its long term trend line. The 14-day Relative Strength Index (RSI) reading is 43**. QQQ ended the week 23.9% 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 25.6 and is now above its 50-day and 90-day moving averages and its long term trend line.
ARTICLE OF THE WEEK:
This week .. The world of exchange traded funds (ETFs) is buzzing with the controversial recent release of the first single stock ETFs. Be very, very careful before being sucked in.
EXPLAINER: FINANCIAL TERM OF THE WEEK:
A weekly feature using information found on Investopedia (may be edited at times for clarity).
Chapter 11 is a form of bankruptcy that involves a reorganization of a debtor’s business affairs, debts, and assets, and for that reason is known as "reorganization" bankruptcy.
Named after the U.S. bankruptcy code 11, corporations generally file Chapter 11 if they require time to restructure their debts. This version of bankruptcy gives the debtor a fresh start. However, the terms are subject to the debtor’s fulfillment of its obligations under the plan of reorganization.
Chapter 11 bankruptcy is the most complex of all bankruptcy cases. It is also usually the most expensive form of a bankruptcy proceeding. For these reasons, a company must consider Chapter 11 reorganization only after careful analysis and exploration of all other possible alternatives.
During a Chapter 11 proceeding, the court will help a business restructure its debts and obligations. In most cases, the firm remains open and operating. Many large U.S. companies file for Chapter 11 bankruptcy and stay afloat. Such businesses include automobile giant General Motors, the airline United Airlines, retail outlet K-mart, and thousands of other corporations of all sizes.
Corporations, partnerships, and limited liability companies (LLCs) usually file Chapter 11, but in rare cases, individuals with a lot of debt who do not qualify for Chapter 7 or 13 may be eligible for Chapter 11. However, the process is not a speedy one.
A business in the midst of filing Chapter 11 may continue to operate. In most cases the debtor, called a “debtor in possession,” runs the business as usual. However, in cases involving fraud, dishonesty, or gross incompetence, a court-appointed trustee steps in to run the company throughout the entire bankruptcy proceedings.
The business is not able to make some decisions without the permission of the courts. These include the sale of assets, other than inventory, starting or terminating a rental agreement, and stopping or expanding business operations. The court also has control over decisions related to retaining and paying attorneys and entering contracts with vendors and unions. Finally, the debtor cannot arrange a loan that will commence after the bankruptcy is complete.
In Chapter 11, the individual or business filing bankruptcy has the first chance to propose a reorganization plan. These plans may include downsizing business operations to reduce expenses, as well as renegotiating debts. In some cases, plans involve liquidating all assets to repay creditors. If the chosen path is feasible and fair, the courts accept it, and the process moves forward.
The Small Business Reorganization Act of 2019, which went into effect on Feb. 19, 2020, added a new subchapter V to Chapter 11 designed to make bankruptcy easier for small businesses, which are “defined as entities with less than about $2.7 million in debts that also meet other criteria,” according to the U.S. Department of Justice.
The act “imposes shorter deadlines for completing the bankruptcy process, allows for greater flexibility in negotiating restructuring plans with creditors, and provides for a private trustee who will work with the small business debtor and its creditors to facilitate the development of a consensual plan of reorganization”.
SIMON@ANGLIAADVISORS.COM | WWW.ANGLIAADVISORS.COM | FOLLOW ANGLIA ADVISORS ON INSTAGRAM
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