05/22/2022. Catch up with all you need to know from the entire previous week in financial markets in less than ten minutes every Sunday by reading or listening to my weekly market review.
The focus of major market participants zoomed in from the macro to the micro last week, from China/Ukraine to Walmart/Target.
Equity prices continued to fall because markets are clearly undergoing a reset of expectations about corporate earnings and are become concerned about what these will look like in the upcoming few quarters, particularly if an aggressive Fed increases interest rates too far and too fast.
The Dow Jones Industrial Average experienced its eighth straight weekly loss, the longest such streak since 1932, near the height of the Great Depression. The S&P 500 and NASDAQ are on their own longest streak of weekly losses since Shaggy (featuring Ricardo ‘Rikrok’ Ducent) told us that it wasn’t him in 2001, after the dot-com bubble burst.
Investors are drawing a line in the sand when it comes to real, tangible earnings vs. vague promises of possible future earnings one day which is why the stocks of the likes of Peloton, Sofi, DocuSign, Robin Hood, Snapchat, Teladoc, Coinbase and the rest have been targeted and demolished. Investors have simply run out of patience with their bullshit.
But last week the pain spread well beyond just the technology and high growth/no earnings stocks. It all began with the US Retail Sales report showing a 0.9% increase in April, exceeding analysts’ average estimates. Excluding autos, they were higher by 0.6%. Sales from the previous month were also revised upward to an increase of 1.4% from the previous 0.7%, however sales declines were reported at gas stations, food/beverage stores, sporting goods and book stores as well as building materials.
The problem with drawing positive conclusions from total retail sales numbers can be shown in microcosm by the Home Depot (HD) Q1 2022 earnings report. The average amount spent per transaction by customers in their stores rose by 11.4% making for a nice bump in revenues generated per customer. But the number of transactions fell 8.2%. The market promptly kicked the shit out of the stock.
Things went from bad to worse when first Walmart (WMT) and then Target (TGT) announced weak earnings but, more importantly, executives for both firms gave extremely downbeat expectations of their future profitability prospects. Both stocks were immediately taken behind the woodshed and dealt with in the customary fashion. The huge problem is that, along with the likes of Home Depot, these are discount retailers and are simply unable to pass higher wholesale inflation costs on to their retail customers in the way that, say, Louis Vuitton or even Tesla can.
On an Investor Day as recently as March this year, Target had reiterated its previous highly optimistic forecasts and forward guidance. So the market’s other concern upon hearing all this was not just how much worse retail business conditions and earnings prospects have gotten, but how quickly they have fallen to get there.
Contagion quickly spread from a few retailers (Macy’s, Nordstroms and Kohls also took a kicking) to the entire American corporate ecosystem and Wednesday saw a bloodbath with no place to hide as markets latched on to any piece of bad news they could find. And there was a lot to pick from.
Wells Fargo Investment Institute cut their 2022 US GDP target from 2.2% to 1.5% while revising their 2023 GDP target down from plus 0.4% to minus 0.5%. Meanwhile, they kept their inflation target unchanged at 7.7%. Standard & Poor’s released their own updated U.S. growth outlook, it was down to 2.2% from 3.2% and cited “negative shocks”. UBS Group announced that it is pricing in a 40% chance of a recession. The Consumer Staples sector, traditionally a kind of hiding place when markets fall, showed itself to be the exact opposite of that last week.
Even American COVID made its way back into investors’ psyche, with New York City hitting a high transmission level and going back to an official High Alert status on the same day that we learned that manufacturing activity in New York State had dramatically and unexpectedly fallen.
Just a couple of weeks ago, in my weekly report titled “Rushing for the Exits”, I wrote; “I suspect many institutional and hedge fund traders are getting destroyed by this volatility and my guess is that in the coming weeks, we will hear about some blow-up casualties”.
Even I was not expecting to hear anything this big this quickly, though. Melvin Capital, a massive $7.8 billion stock-picking hedge fund (famous for having been the prime target of the meme-stock Reddit crowd last year) shut down for good last week with founder Gabe Plotkin admitting that the last 17 months had been “an incredibly trying time” and that “I now recognize that I need to step away from managing external capital”. Ya think?
There was actually some good news on the other side of the ledger though, such as Shanghai's authorities confirming that it had met the goal of three straight days of zero COVID transmissions outside of quarantined areas continuing to raise hopes of an easing of the Chinese lockdown situation and the possibility of a smidge of supply chain chaos relief. Also, the possibility that inflation may have peaked appeared to at least be being considered by the bond market with 10 year Treasury interest rates steadying and even falling a bit.
The search for the stock market bottom continues. On Friday, the S&P 500 finally slipped into bear market territory (see FINANCIAL TERM OF THE WEEK below) in the early afternoon, down over 20% from its recent high. But a furious late rally meant that it did not close there. We can leave the niceties of whether a bear market is officially under way as the result of an intraday -20% or whether it’s the closing price that counts to Wall Street technicians, but it is interesting to note that, since 1950, one month after a bear market level has been breached, the S&P 500 has been higher 83% of the time and one year later, the index has been higher 75% of the time, with an average gain of 17%.
Time is money - literally .. Buyers of new construction properties are facing higher costs while they wait for their homes to be completed. People who agreed to buy homes under construction but haven’t yet closed are facing mortgage-interest rates that could be close to double what they counted on when they went into contract and paid their deposits, while builders struggle with supply chain issues and rapidly increasing prices for their materials and labor. Upset borrowers, so far, have been grudgingly willing to absorb all these unanticipated additional costs in order to keep their purchase, but the market for newly-built homes is unlikely to be able to maintain current price levels for a whole lot longer under these conditions.
Existing home sales tailing off .. Sales of existing homes fell in April to the lowest level since the early months of the COVID outbreak as skyrocketing prices and mortgage rates clearly deterred potential buyers. Existing home sales fell 2.4% from the month before to an annualized rate of 5.61 million, the fewest since June 2020, with more sales declines expected in the coming months.
The median price for an existing home in the US hit a record $391,200, that’s 14.8% higher than a year ago. It was the 122nd consecutive month of year-over-year increases, the longest streak of gains on record. Along with elevated prices, those looking to buy a home are facing interest rates that are near levels not seen in almost 13 years. The average rate on a 30-year fixed-rate mortgage is now 5.25%.
Is he poor yet? .. Do Kwon, the trash-talking South Korean entrepreneur who previously refused to address the many concerns about the crypto stable-coin TerraUS/Luna that he founded, by announcing “I don’t debate the poor” and an enthusiastic adopter of the crypto bros’ favorite meme aimed at the rest of us, “Have fun staying poor”, sent a pseudo-apologetic tweet out last week aimed at the multitude of people and households who have lost their life savings after the complete collapse (that I reported and linked to details of in last week’s review, Other News - Crypto Edition) of what he called his “dearest creation named after my greatest invention” . He also named what was presumably his second-dearest creation, his daughter Luna, after it.
Unable to be comforted by his charming tweet, however, are the estimated 20 people so far from around the world who have apparently already committed suicide as a result of the failure of this doomed Ponzi scheme. When are some of these fraudsters from the darker corners of the crypto universe going to serve some jail-time for the consequences of the damaging stunts they are pulling?
Under The Hood:
Maybe the most difficult (yet very important) task in the market right now is the need for investors to distinguish between intensifying selling and capitulation / liquidation. If you mistake the former for the latter, it could prove costly. Mistaking the latter for the former could lead to a possible opportunity cost. The weight of the technical evidence still points to heavy declines being more likely to be evidence of intensifying selling which is by definition the continued deterioration of bear market rather than capitulation/liquidation which could mark the elusive bottom from which markets catapult higher.
Until that weight shifts to the other side of the ledger, the working assumption should be that the direction of least resistance (periodic short-lived over-sold rallies not withstanding) remains downward in the shorter/intermediate term. Trends in the key under-the-hood indicators do not point to gathering strength at this time.
The divergence between Lowry’s Buying Power and Selling Pressure, currently solidly in favor of the sellers and whose progress I document each week in the LAST WEEK BY THE NUMBERS section of this weekly report, needs to narrow considerably to begin to shift that weight in favor of a resumption of an upward trend.
Anglia Advisors clients are welcome to reach out to me to discuss market conditions further.
The upcoming week’s calendar ..
Q1 2022 earnings season winds down next week, but there are still around a dozen S&P 500 companies left to report, with a distinctly retail feel to it, like Costco, Macy’s, Gap, Best Buy, AutoZone, Advance Auto Parts, Dollar Tree, Dollar General, Ulta Beauty and Dick’s Sporting Goods. After last week’s turmoil with Walmart and Target, these will be watched closely. Also reporting from beyond retail-world are Nvidia, Alibaba, Snowflake, Dell, Zoom and Toll Brothers.
There will also be several investor days and annual shareholders’ meetings next week, including from JPMorgan Chase, Chevron, Exxon-Mobil, Meta/Facebook, United Airlines and, interestingly, Twitter.
Nothing earth-shattering on tap next week on the economic data release front. The manufacturing and services purchasing managers’ indexes, the durable goods report and personal income and spending data will be released.
The minutes from the Federal Open Market Committee's monetary policy meeting earlier this month, at which the Fed’s benchmark interest rate target was increased by half a percent, will be published on Wednesday.
US INVESTOR SENTIMENT LAST WEEK (outlook for the upcoming 6 months):
↑Bullish: 26% (up from 24% the previous week)
→Neutral: 24% (down from 26% the previous week)
↓Bearish: 50% (unchanged from 50% the previous week)
Net Bull/Bear spread .. ↓Bearish by 24 (Bearish by 26 the previous week)
Long term averages: Bullish: 38% — Neutral: 32% — Bearish: 30% — Bull-Bear spread: Bullish by 8
Source: American Association of Individual Investors (AAII). All numbers rounded.
LAST WEEK BY THE NUMBERS:
- Last week’s best performing US sector: Energy (two biggest holdings: Exxon-Mobil, Chevron) - up 1.5%
- Last week’s worst performing US sector: Consumer Staples (two biggest holdings: Proctor & Gamble, Coca-Cola) - down 7.9%
- The NASDAQ-100 once again had a significantly worse week than the S&P 500
- US Markets severely underperformed all overseas markets last week
- Small and Mid Cap performed less badly than Large Cap
- Once again, Growth hugely underperformed Value
- The proprietary Lowry's measure for US Market Buying Power is currently at 167 and rose by 3 points last week while that of US Market Selling Pressure ended Friday at 205 and fell by 2 points over the course of the week
- SPY, the S&P 500 ETF is well below both its 50-day moving average and its 90-day and remains a long way below its long term trend line. The 14-day Relative Strength Index (RSI) reading is 36**. SPY ended the week 18.4% below its all-time high (01/03/2022)
- QQQ, the NASDAQ-100 ETF, is well below both its 50-day moving average and its 90-day and remains a long way below its long term trend line. The 14-day Relative Strength Index (RSI) reading is 35**. QQQ ended the week 28.5% below its all-time high (11/19/2021)
** RSI readings range from 0-100. Readings below 30 indicate an over-sold condition, possibly primed for a technical short term rebound and above 70 are considered over-bought, possibly primed for a technical short term decline.
- VIX, a quantifiable measure of anticipated upcoming risk and volatility based on S&P 500 index options, often referred to as the “fear index”, is above both its 50-day moving average and its 90-day and remains well above its long term trend line.
ARTICLE OF THE WEEK:
Each week I'll link to an interesting article I have come across recently.
This week: You often hear the terms “secular” and “cyclical” thrown around when it comes to financial markets. The distinction between the two is important to understand.
FINANCIAL TERM OF THE WEEK:
A weekly feature using information found on Investopedia (may be edited at times for clarity).
A bear market is when a market experiences prolonged price declines. It typically describes a condition in which securities prices fall 20% or more from recent highs amid widespread pessimism and negative investor sentiment.
Bear markets are often associated with declines in an overall market or index like the S&P 500, but individual securities or commodities can also be considered to be in a bear market if they experience a decline of 20% or more over a sustained period of time—typically two months or more. Bear markets also may accompany general economic downturns such as a recession. Bear markets may be contrasted with upward-trending bull markets.
Stock prices generally reflect future expectations of cash flows and profits from companies. As growth prospects wane, and expectations are dashed, prices of stocks can decline. Herd behavior, fear, and a rush to protect downside losses can lead to prolonged periods of depressed asset prices.
One definition of a bear market says markets are in bear territory when stocks, on average, fall at least 20% off their high. But 20% is an arbitrary number, just as a 10% decline is an arbitrary benchmark for a correction. Another definition of a bear market is when investors are more risk-averse than risk-seeking. This kind of bear market can last for months or years as investors shun speculation in favor of boring, sure bets.
The causes of a bear market vary, but in general, a weak or slowing or sluggish economy, bursting market bubbles, pandemics, wars, geopolitical crises, and drastic paradigm shifts in the economy such as shifting to online economy, are all factors that might cause a bear market. The signs of a weak or slowing economy are typically low employment, low disposable income, weak productivity, and a drop in business profits.
For example, changes in the tax rate or in the federal funds rate can lead to a bear market. Similarly, a drop in investor confidence may also signal the onset of a bear market. When investors believe something is about to happen, they will take action—in this case, selling off shares to avoid losses.
Bear markets can last for multiple years or just several weeks. A secular bear market can last anywhere from 10 to 20 years and is characterized by below-average returns on a sustained basis. There may be rallies within secular bear markets where stocks or indexes rally for a period, but the gains are not sustained, and prices revert to lower levels. A cyclical bear market, on the other hand, can last anywhere from a few weeks to several months (for more about this distinction, see the ARTICLE OF THE WEEK above).
The U.S. major market indexes were close to bear market territory on December 24, 2018, falling just shy of a 20% drawdown. More recently, major indexes including the S&P 500 and Dow Jones Industrial Average (DJIA) fell sharply into bear market territory between March 11 and March 12, 2020.3 Prior to that, the last prolonged bear market in the United States occurred between 2007 and 2009 during the Financial Crisis and lasted for roughly 17 months. The S&P 500 lost 50% of its value during that time.
In February 2020, global stocks entered a sudden bear market in the wake of the global coronavirus pandemic, sending the DJIA down 38% from its all-time high on February 12 (29,568.77) to a low on March 23 (18,213.65) in just over one month. However, both the S&P 500 and the NASDAQ-100 had fully recovered and made new highs by August 2020.
This material represents an opinionated assessment of the market environment based on assumptions at a specific point in time and is always subject to change. 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 or outcomes. The material contained herein is insufficient to be exclusively relied upon as research or investment advice. The user assumes the entire risk of any actions taken based on the information provided in this or any other Anglia Advisors post or other communication.
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