Commentary for October, 2022

Hello all - we hope you had a nice October.

It was finally a nice month for the markets.  The Dow did extremely well and had its best month since 1976 on a gain of 14.1%. 

 

The S&P and Nasdaq had their best month since July with gains of 8.1% and 3.9%, respectively. 

 

Here’s a closer look at the markets this month.

 

 

While the overall markets were higher, the performance of the different sectors varied widely.

Tech stocks did very poorly this month.  

On the other hand, the energy, financial, and other “old economy” sectors did well.  These old economy sectors include industrials, which are stocks like Union Pacific, Honeywell and Caterpillar.  The other sector is consumer staples, which has names like Proctor and Gamble, Coca-Cola, and Colgate-Palmolive.  

 

Also helping the market was a lower U.S. dollar.  A trend we’ve seen lately is as the dollar strengthens, the market goes lower.  This month, the dollar was weaker and the stock market rose. 

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 EARNINGS

While the Fed had been the main driver of the direction of the market over the last few months, corporate earnings finally took the spotlight in the latter part of October.  

Actually, some of the attention to earnings may have been because the Fed was in a “blackout period” before their policy meeting this week.  The blackout period meant no speeches or press appearances for the Fed members, so its possible the lack of visibility caused the market and press to focus their attention elsewhere.  

Regardless, we’re about halfway through the corporate earnings results for the third quarter and results haven’t been that great.

Tech companies, in particular, have not fared well and are warning of a slower economy in the coming months.  

Other sectors are doing fairly well, though.  Like we mentioned in the intro to this commentary, sectors like energy, financials, industrials, and consumer staples have held up nicely.  Travel and luxury companies have done well, too.  The good returns in these stocks and sectors helped the overall markets this month.  

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THE FED

A lot of the optimism in the markets this month was due to the Fed, too.  

The Fed has been sharply pulling back on their stimulus (by raising borrowing costs) in recent months.  However, many investors believe the Fed is now at a point where they won’t pull back on stimulus as much.  This has given a tailwind to the markets. 

 

The Fed meets later this week and we’ll find out their plans for the stimulus program.  It’s very likely we’ll see a lot of volatility - either higher or lower - depending on what they announce.

 

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INFLATION

With the Fed so focused on inflation, investors have been paying very close attention to it, too.  

Investors were looking for inflation to come down over the past month, but the CPI report showed inflation increasing again when looking at it month-by-month. 

 

On a yearly basis the inflation level is lower, but the “core” metric, which excludes food and energy, was higher.  This is a bad sign for inflation. 

 

Here’s a look at the “core” metric on a monthly basis:

 

Inflation at the business level (the PPI) moved higher on a monthly basis again.  Investors were hoping to see this number lower. 

 

 On an annualized basis, though, PPI is lower.

 

We’re seeing evidence of more costs coming down, too.  Shipping prices keep coming down and this will translate into lower CPI and PPI prints in the future.

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OTHER ECONOMIC DATA

Economic data released this month was almost all negative.  The one bright spot was the GDP report showing the strength of the economy over the past quarter.  Following two down quarters, the GDP growth was a decent 2.6%. 

 

As for the bad news, the manufacturing and service parts of our economy moved lower over the most recent month. 

 

Job openings were sharply lower.

 

We don’t talk about housing often, but home prices look like they are starting to make the turn lower.  

Home prices traditionally rose at the same rate as people’s incomes.  In the chart below, you can see just how disconnected they have become in recent years. 

 

Retail sales were flat from the previous month.

 

Durable goods - which are items with a longer life, like a phone or dishwasher – turned lower.

 

Consumer confidence also turned lower. 

 

Confidence at small businesses rose slightly, for its third higher month.

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Where does the market go from here?

A lot depends on the news later this week.  

First, we have the Fed meeting which will give us more clarity on their stimulus plans.  

The monthly employment report will be released on Friday.  The Fed believes more employment results in more inflation, so they want to see less employment (although they are completely wrong in this belief).  A bad employment report will likely be good for the stock market.  

Next week we have the midterm elections and the inflation reports, all certain to impact the markets.  

Helping the markets right now is seasonality.  The last three months of the year are usually the best time of the year for the market.  This is especially true in an election year, like this year, so this gives the market a tailwind.

The market indicators we follow show stocks being somewhat expensive in the short term and the odds of a pullback are greater than a rise.  Like we mentioned above, though, a lot of news is coming that will impact the direction of the market.  




This commentary is for informational purposes and is not investment advice, an indicator of future performance, a solicitation, an offer to buy or sell, or a recommendation for any security. It should not be used as a primary basis for making investment decisions. Consider your own financial circumstances and goals carefully before investing. Past performance cannot guarantee results.

Commentary for September, 2022

Hello all - we hope you had a nice September.

While we hope you had a nice September, it wasn’t a nice month for the markets.  In fact, it was the worst month in over two years. Stocks actually started out on a strong note, but a higher-than-expected inflation report pricked the bubble and the market fell sharply for the rest of the month.

The Dow fell 8.8%, the S&P 500 lost 9.3%, and the Nasdaq, which has a higher concentration of tech companies, closed down by 10.5%.  

We also closed out a dismal third quarter, for three negative quarters in a row.  That hasn’t happened since 2009.  For the quarter, the Dow was off 6.7%, the S&P was off 5.3%. and the Nasdaq dropped 4.1%.   

 

 

Here’s a closer look at the markets this month.

 

Every sector was lower, which is uncommon.

 

Market volatility started rising in August and continued to rise sharply in September. 

 

 

It wasn’t just stocks, but bonds have fared very poorly.  Bond yields are reaching their highest levels in over a decade, which means the bond prices have fallen by a similar amount. 

 

Investment portfolios typically have two main asset classes: stocks and bonds. Bonds are seen as safer than stocks, and riskier portfolios have less bonds and more stocks.  

An average diversified portfolio might have around 60% stocks and 40% bonds.  Since bonds have done so poorly this year, that 60/40 portfolio has had its worst year since 1931. 

 

 This shows how unusual the drop in bonds has been this year.  

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THE FED

This market behavior is still all due to the Fed.  

For several months now, the Fed has expressed their worry over high inflation.  Their cure for high inflation is to slow down the economy by raising borrowing costs (interest rates).  This month they raised interest rates by another 0.75%.

 

The pace at which they are raising interest rates is the fastest on record.

 

We think the Fed is making a mistake here.  

The Fed has undertaken the biggest stimulus program in the history of the world (it’s true), and they do need to pull back from that stimulus.  And we knew getting out of the stimulus would be a problem.  But the argument the Fed is using to justify its rate increases is just flat out wrong.  

The Fed believes inflation and employment are related – they think inflation is caused when employment is good (more are people working and spending money) and vice-versa.  

Therefore, their solution to bringing inflation down is to reduce employment (less people working, so more people fired).  This is their justification for slowing down the economy.

However, it is not true that more employment results in more inflation, especially at this time.  

The current inflation is actually caused by a couple factors, like high energy prices, problems with the supply chain coming out of Covid shutdowns, and by too few people working.  

Coming out of Covid, businesses were pleading for more workers and had to pay higher wages to entice workers back.  Wages have remained high ever since and have even continued climbing.  Businesses have raised their prices as a result of paying higher wages.  Its this lack of employment that has caused inflation.

The real solution to inflation is to boost employment, not reduce it.  This is the exact opposite of what the Fed believes.  

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INFLATION

With the Fed so focused on inflation, investors have been paying very close attention to it, too.  

Investors were looking for inflation to come down over the past month, but the CPI report showed inflation increasing again when looking at it month-by-month. 

 

On a yearly basis the inflation level is lower, but still higher than investors were expecting.

 

 

The higher inflation report sparked a strong market sell-off that continued until the end of the month. 

 

On a positive note, inflation at the business level (the PPI) had its second month lower.  This was driven largely by the lower gas prices. 

 

We’re seeing evidence of more costs coming down, too, and this will translate into lower CPI and PPI prints in the future.

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OTHER ECONOMIC DATA

We’ll start with a positive report.  Economists forecast for GDP this quarter are rising as economic data hasn’t been too bad. 

 

Over the past month, the strength of the manufacturing and service sectors were both roughly flat.

 

Retail sales were up slightly.

 

Durable goods - which are items with a longer life, like a phone or dishwasher – were also up slightly. 

 

Sentiment continues to improve.   Consumer confidence moved higher for the second month. 

 

Confidence at small businesses had been very poor, but saw its second higher month.

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Where does the market go from here?

Last month we stated the markets looked cheap in the short run and were likely to rise – and markets did rise.  Only to later sell-off strongly.  

Based on the indicators we watch, stocks again look very oversold (cheap) in the short-term.  At the end of the month, only 3% of stocks in the S&P 500 were above their average of the last 50 days.  Only 12% of stocks are above their 200-day average.  These are numbers usually seen at market lows. 

 

We wouldn’t be surprised to see a rise in stocks from here, but inflation and employment reports will be very important in determining market direction.    

Another thing the market has going for it is seasonality.  October has historically been the best month during midterm election years.  This year has been anything but normal, so we wouldn’t rely on this too much!

 

This commentary is for informational purposes and is not investment advice, an indicator of future performance, a solicitation, an offer to buy or sell, or a recommendation for any security. It should not be used as a primary basis for making investment decisions. Consider your own financial circumstances and goals carefully before investing. Past performance cannot guarantee results.

Commentary for August, 2022

Hello all - we hope you had a nice August.  Hard to believe we are already into September.  

Markets started the month moving higher, but reversed course to finish the month in the red.  The Dow fell 4.1%, the S&P 500 lost 4.2%, and the Nasdaq, which has a higher concentration of tech companies, closed down by 4.6%. 

Here’s a closer look at the markets this month.

 

August also started with a low level of volatility in the market, but it quickly became volatile.

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THE FED

This month was all about the Fed.

Stocks rose early in the month when economic data showed inflation finally starting to turn lower and economic data weakening.  The thinking for investors was that a weaker economy and lower inflation would make the Fed less likely to keep pulling back on its stimulus.  

However, the Fed held a gathering in Jackson Hole, WY with central bankers from all over the world in attendance (isn’t it nice how these government employees get retreats all over the world?).  

At this meeting, Fed chief Jerome Powell cited concerns about high inflation.  He stated that even if the economy slows and inflation comes down slightly, they’ll keep pulling back on their stimulus.  This is the opposite of what investors expected and stocks sold off as a result.  

Here’s a quote that got a lot of attention:

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.

That means the Fed will keep pulling back on stimulus, no matter what.  Investors looking for a softer tone from the Fed have been sorely disappointed. 

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Inflation did finally tick lower this month, which is why many investors were looking for the Fed to moderate their stance. 

 

Inflation at the business level (the PPI) finally had its first lower month in over two years.  This was driven largely by the lower gas prices. 

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OTHER ECONOMIC DATA

Employment data has been a bright spot for the economy. Monthly job figures show solid gains.

 

Further, the level of job opening remains high, with two job openings available for every one unemployed person in the country.

Outside of employment, other economic data looks rather poor.  Several parts of the country are seeing shrinking economies.

 

On the national level, manufacturing continued to move lower.

However, the service sector ticked up slightly.

Retail sales were flat on the month.

Durable goods - which are items with a longer life, like a phone or dishwasher – were also flat. 

Sentiment finally improved last month.   Consumer confidence moved higher. 

 

Confidence at small businesses had been very poor, but finally saw a slight rise over the last month.

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Where does the market go from here?

Markets look a little oversold (cheap) in the short term.  We’d like to see some strength before putting new money in (like higher days with solid volume, less stocks trading at their lows of the year, etc.), but we may be seeing a good opportunity soon.  Of course, it all depends on comments from the Fed and new economic data results.

Keep in mind that the fall tends to be a very volatile time for the markets.  There have been historic crashes in October, and September has been the worst month of the year for investors.   Caution is warranted. 

This commentary is for informational purposes and is not investment advice, an indicator of future performance, a solicitation, an offer to buy or sell, or a recommendation for any security. It should not be used as a primary basis for making investment decisions. Consider your own financial circumstances and goals carefully before investing. Past performance cannot guarantee results.