For years, corporate America and stock market investors could rely on the Federal Reserve to have their back. Ridiculously low borrowing costs turbo-charged stock prices - especially those of profitless (and sometimes mindless) tech companies. The Fed’s interests were aligned with those of the likes of Apple, Tesla and Microsoft but also with those of regular people pouring money in their 401k every two weeks. The Fed’s extended purchases of mortgage bonds drove up home prices, delighting homeowners.
Everyone was a winner. Well, everyone except would-be first time home buyers who watched prices soar out of their reach and savers and those living on fixed income investments for whom income dried to up pretty much zero.
A whole generation of stock market participants learned to reduce their investment time horizon from decades to hours. Others learned to sink money into all sorts of nonsense and some even made a quick buck out of it for a while. This was all brought about by the orgy of easy money that the Fed created.
But Lucy has now pulled the football. The stock market’s ex-sugar-daddy has deleted and blocked its phone number. The Fed’s job has never been to prop up the stock market, it just so happened that, for a good while there, the interests of the two were joined at the hip. But not any more. The cavalry ain’t coming this time.
Markets were due for a relief bounce following the steep declines of the past couple of weeks, and that started happening on Monday as there were some light positives from corporate earnings and guidance (Ralph Lauren, RL), while old school BTFD’ers and short-covering helped all the broad indexes rally coming into Fed Decision Day.
However the announcement, when it arrived on Wednesday afternoon, of the 0.75% increase in the Fed Funds rate and particularly the tone of Fed Chair Jerome Powell’s subsequent press conference, confirmed that the Fed continues to be wedded to an extremely hawkish stance and it was reiterated yet again (just in case there’s anyone left for whom this hasn’t sunk in yet) that, even if we have indeed already seen peak inflation (far from certain) and the Consumer Price Index (CPI) readings do start to trend lower from here, that is not even close to what the Fed needs to see in order to change its monetary policy. They will require multiple months of consistently falling inflation and their 2% target CPI rate appearing realistic before they will ease up on their current stance.
Most of us heard nothing really new or surprising here, but some people need to be told things over and over before they finally absorb it - especially when what they are being told directly conflicts with what they yearn for (ie., an end to all this bearish, risk-off environment and a return to a nice, easy steadily rising stock market).
Fed officials did out-hawk us all, however, with their frankly quite astoundingly front-loaded expectations of what comes next in their Summary of Economic Projections (the so-called Dot Plot). The median forecast within the Fed is for the Fed Funds rate to rise to 4.4% by the end of this year, then up to 4.6% early in 2023 with some members of the committee thinking quite a bit higher. As recently as June, those median numbers had been respectively 3.8% and 3.4%.
If accurate, these latest projections would mean a total of still another one and a half percentage points of rate increases from here. That puts a fourth-straight 0.75% hike very much on the table for the next meeting in November (just six days before the US midterm elections) and then maybe even extending the streak to five in the one after that in December.
The market’s expectation for the Terminal Rate (the Fed Funds rate at the time the Fed stops raising rates) is now about 4.62% and rising.
After initially meandering higher following the announcement (perhaps based upon an element of relief that the hike was not a full percentage point), markets turned sour and spent the last part of Wednesday falling hard.
The scenario of a no-recession outcome to what we are seeing is becoming less and less likely and the growling bears immediately turned their eyes hungrily on the 2022 S&P 500 lows of June 16th (SPX 3,666) as their next destination. By the end of yet another brutal Friday session to close the week, we were almost there (SPX 3,693).
Investors will now turn their attention to the Q3 earnings season next month (see EXPLAINER: FINANCIAL TERM OF THE WEEK below) and it could be tough for stocks. A bleak warning last week from Ford Motor (F) about its upcoming earnings built on the previous week's dismal commentary from FedEx (FDX).
The major indexes have still not yet priced in a material economic slowdown in the US and/or a really bad Q3 earnings season. If these both come to pass in a substantial way, the stock market could easily sink a lot further and still not be at a compelling value. Remember, however, that neither scenario is a given and it could be that both are avoided, but these are the factors that need to be top of mind for investors in the coming weeks. Keep an eye on them (or let me do it for you and just read/listen to my report each week).
To end on a slightly more positive note, while the last few weeks have been undoubtedly painful, much of the baseless, naive hopes of a quick resolution to all of the economy’s issues and imminent falling interest rates have now been been tossed into the garbage and we may possibly be back to having a stock market that is more sensibly and accurately priced.
OTHER NEWS:
The newest emerging market? .. The United Kingdom is now essentially being treated by financial markets (and ex-Treasury Secretary Larry Summers) as an emerging market, in the same category as Vietnam, the Philippines, South Africa or Chile, which are viewed as not having the same degree of reliable, disciplined institutions setting economic policy as more developed economies such as those in North America, most of Western Europe/Scandinavia and Australasia.
This comes after new UK prime minister Liz Truss and her new finance minister Kwasi Kwarteng introduced a mind-bending package of tax cuts, unfunded state aid and colossal increased borrowing. They claim it is intended to stimulate growth, but it clearly risks turbo-charging already out-of-control inflation and increasing the odds of a very nasty and prolonged recession. It’s a massive gamble of the part of the new government that is likely only two years out from a general election. Even the independent central bank, the Bank of England appeared shocked.
Financial markets hated the plan, viewing it as a reckless, vote-seeking set of gimmicks that put the country in economic peril. Their punishment was swift and severe, the UK currency immediately plunged to its lowest level against the US Dollar since 1985 and the benchmark five-year interest rate exploded upwards for its largest one-day increase in its history.
The problem for US investors is that the UK constitutes a relatively large component holding in exchange-traded funds and mutual funds focused on so-called developed international markets. These are very common among, for example, many 401k fund allocations.
Global phenomenon .. It’s not just the US that is busy raising rates. Just last week alone, the central banks of the UK, Switzerland, Sweden, Norway, South Africa and Indonesia all did the same. Japan did not raise rates but did announce central bank intervention in foreign exchange markets to support the yen. The last time that happened, Will Smith was getting jiggy with it in 1998.
Fewer jobs at the big guys .. Meta/Facebook is reportedly cutting staff in a push to reduce costs. the company is looking to cut costs by at least 10% while rival Google is requiring some existing employees to apply for new jobs. Walmart plans to hire fewer workers than last year as it prepares for the holiday season amid a slowing economy. Walmart plans to add 40,000 workers in seasonal and full-time roles compared to 150,000 hires last year.
UNDER THE HOOD:
Market action since the release of the CPI numbers on September 13th has mostly reflected a renewed urgency among sellers. Perhaps more importantly, this urgency to sell stocks has been accelerating.
During long-term market downtrends, it is especially easy to be seduced by the idea that simple counter-trend rallies are something more meaningful. However, as history has demonstrated, these moves against the dominant downtrend are normal. No market trend, up or down, continues in a straight line. Therefore, it is critical to be really, really wary of moves against the dominant trend during bear markets. Many investors learned that lesson the hard way over the summer.
Investors should remain aware that the probabilities still favor further downside moves on an intermediate-term basis and whether or not yet another over-sold rally develops in the short-term is frankly of very little importance in the current market atmosphere.
I prefer to let the data speak because we cannot know what the Fed is thinking, or where inflation is heading. If the bulls need a straw to clutch at, the current lack of restraint being shown by sellers could just possibly lead to the beginning of the explosive orgy of selling that can sometimes cause the long-awaited exhaustion of supply that can coincide with major market turnarounds - but only if it is accompanied by a concurrent and equally passionate level of Demand and there is absolutely no sign of that right now.
The body of evidence strongly suggests that the downtrend remains comfortably intact.
Anglia Advisors clients are welcome to reach out to me to discuss market conditions further.
THIS WEEK’S UPCOMING CALENDAR ..
It will be a relatively quiet week, before the storm of third-quarter earnings season picks up in mid-October. A handful of stragglers like Nike, Paychex, Micron and CarMax will report earnings next week as the Q2 earnings season draws to a close.
The biggest piece of economic data out next week is the Personal Income and Expenditures Report for August, which will include the Personal Consumption Expenditures (PCE) price index. The Core version of this is the Fed’s favorite measure of how their battle with inflation is going.
US INVESTOR SENTIMENT LAST WEEK (outlook for the upcoming 6 months):
↑Bullish: 18% (down from 26% the previous week)
→Neutral: 21% (down from 28% the previous week)
↓Bearish: 61% (up from 46% the previous week)
Net Bull/Bear spread .. ↓Bearish by 43 (Bearish by 35 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:
Last week’s market color from finviz.com
- Last week’s best performing US sector: Consumer Defensive (two biggest holdings: Proctor and Gamble, Coca-Cola) for the second week in a row - down 1.3%
- Last week’s worst performing US sector: Technology (two biggest holdings: Apple and Microsoft) for the second week in a row - down 19.9%
- Last week’s ugliness hit the S&P 500 and the NASDAQ-100 pretty much equally
- International Developed Markets fared the worst last week ahead of US Markets and Emerging Markets
- Large Cap stocks fell slightly less than both Mid and Small Cap
- Value performed a little worse than Growth
- The proprietary Lowry's measure for US Market Buying Power is currently at 139 and fell by 12 points last week and that of US Market Selling Pressure is now at 174 and rose by 12 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 32**. SPY ended the week 22.9% 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 32**. QQQ ended the week 31.8% 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 again at 29.9. It remains above its 50-day and 90-day moving averages and well above its long term trend line.
ARTICLE OF THE WEEK:
This week .. Personal finance and investing is filled with false myths, truisms, damaging mental short cuts, self-delusion and more. Some of the most dangerous phrases in the world of personal finance that financial planners hear from prospects and clients over and over again are outlined here.
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) .
A quarterly earnings report is a quarterly filing made by public companies to report their performance. Earnings reports include items such as net income, earnings per share, earnings from continuing operations, and net sales. By analyzing quarterly earnings reports, investors can begin to gauge the financial health of the company and determine whether it deserves their investment.
Fundamental analysts believe that good investments are identified with hard work in the form of ratio and performance analysis. Particular attention is paid to the trend in ratios gleaned from the quarterly earnings reports over time, rather than solely the single data point from each report. One of the most anticipated numbers for analysis is earnings per share because it provides an indication of how much the company earned for its shareholders.
Quarterly earnings reports generally provide a quarterly update of all three financial statements, including the income statement, the balance sheet, and the cash flow statement. Every quarterly earnings report provides investors with three things: an overview of sales, expenses, and net income for the most recent quarter. It may also provide a comparison to the previous year, and possibly to the previous quarter. Some quarterly earnings reports include a brief summary and analysis from the CEO or company spokesman, as well as a summary of previous quarterly earnings results.
The quarterly earnings report is generally backed up by the company's Form 10-Q, a legal document that must be filed with the Securities and Exchange Commission every quarter. The 10-Q is more comprehensive in nature and provides additional details behind the quarterly earnings report. The exact date and time of the quarterly earnings report announcement are obtainable by contacting a company's investor relations department. The 10-Q is usually published a few weeks after the quarterly earnings report.
Every quarter, analysts and investors wait for the announcement of company earnings. The announcement of earnings for a stock, particularly for well followed large capitalization stocks, can move the market. Stock prices can fluctuate wildly on days when the quarterly earnings report is released.
For better or worse, a company's ability to beat earnings estimates projected by analysts or the firm itself is more important than the company's ability to grow earnings over the prior year. For example, if the company reports earnings growth from the prior period in its quarterly earnings report, but fails to meet or exceed the estimates published before the release, it may result in a sell-off of the stock.
In many ways, analyst estimates are just as important as the earnings report itself. In capital markets, it is all about market expectations since expectations are reflected in stock prices already based on the efficiency theory. This is why any variance from the included expectations in the stock price impact the price up or down.
SIMON@ANGLIAADVISORS.COM | WWW.ANGLIAADVISORS.COM | FOLLOW ANGLIA ADVISORS ON INSTAGRAM
PLEASE MAKE A NOTE OF OUR NEW PHONE NUMBER TO CALL OR TEXT: (929) 677 6774
This material represents an opinionated assessment of the financial market environment based on assumptions and prevailing data at a specific point in time and is always subject to change at any time. No warranty of its accuracy is given. It is not intended to act as a forecast of future events, nor does it constitute any kind of a guarantee of any future results, events or outcomes.
The material contained herein is at no time ever intended to constitute tax, legal or medical advice. It is also wholly insufficient to be exclusively relied upon as research or investment advice or as a sole basis for any investment decisions. The user assumes the entire risk of any actions taken based on the information provided in this or any other Anglia Advisors post.
Posts may contain links or references to third party websites for the convenience and interest of readers. While Anglia Advisors may have reason to believe in the quality of the content provided on these sites, the firm has no control over, and is not in any way responsible for, the accuracy of such content nor for the security or privacy protocols the sites may or may not employ. By making use of such links, the user assumes, in its entirety, any kind of risk associated with accessing them and making any use of the information provided therein.
Clients of Anglia Advisors may maintain positions in securities and asset classes mentioned in this post.
If you enjoyed this post, why not share it with someone or encourage them to subscribe themselves?
