Market Commentary

August 4, 2022

August 2022 Review - Looking Forward

August was a difficult month for the stock market. July 14th began a rally of 17% which carried to August 16th. By the end of August, the market gave back almost 70% of the gain. Low trading volumes and lack of buyer interest prevailed. Buyers stepped aside liquidating mutual funds in droves.

The spin was accentuated by Fed Chair Powell’s eight-minute terse speech in Jackson Hole Wyoming. The address confirmed the Fed would raise rates until there is a clear sign of inflation moving toward their 2% target. The markets’ response saw the DOW drop 1,000 points once the speech concluded. The investing climate had to shift and come to grips with continued higher interest rates, a longer inflation timeline and with little chance of a Fed pivot to easing.

After falling 21% in the first half of 2022, the S&P500 hit a bottom of 3,666.77 on June 16th and bounced to 4,305.20 by August 16th. Bulls were shaken by the abrupt price swings.

S&P500:              August-4.24%          YTD -17.02%
August-4.06%          YTD -13.28%
             August-4.64%          YTD -24.47%
Russell 2000:    
August -1.84%         YTD -17.58%

Sector Performance YTD:

Communication Services       -31.0%
Consumer Discretionary        -24.2%
Consumer Staples                     -5.7%
Energy                                      +44.7%
Financials                                 -15.7%
Healthcare                                -11.7%
Industrials                                 -12.5%
Materials                                   -16.9%
Real Estate                                -19.4%
Technology                               -22.6%
Utilities                                       +3.4%

Bonds have begun to move into a competitive position with stocks. Higher interest rates are typical of late business cycles and have weighed on price action of longer duration bonds. In the past, those higher rates can also offer the opportunity for income investors. Cash has also benefited with money market funds yielding as high as 1.85%. This is a low-risk option while waiting for the Fed to work through inflation.

Treasury Rates:

1 Month Bill             2.19%
3 Month Bill             2.83%
6 Month Bill             3.37%
2 Year Note              3.49%
5 Year Note              3.45%
10 Year Note            3.32%
30 Year Note            3.47%

As September moves forward, the markets are clearly in overpriced territory. The Fed has established their position on inflation, and more work is still ahead. Real estate, employment and earnings still need to be closely watched, and the election will also be a factor. Analyst earnings projections are possibly too optimistic. Earnings so far in 2022 have been better than expected and analysts are slow to respond. Our framework for S&P500 earnings expectations is $225ps in 2022 and $235ps in 2023. We have positioned our portfolios with quality companies and high cash to insulate the inflation impact.

The inflation news is improving, and we expect the market to start to respond as we move into the fourth quarter, and most likely produce another rally. Our sense is that we are closer to an inflation conclusion before year-end. Once the market discerns that the Fed is shrinking the rate increases, it will allow for a return to a positive market. We are getting closer.

August 4, 2022

July 2022 Review - Looking Forward

The second quarter of 2022 passed a series of tests, comforting investors. Major stocks held up. Amazon has been a marginal performer for over a year. Under the new leadership of Andy Jasse, the company has shifted to a cost sensitive approach with the clear intent to reduce labor and real estate expenses influencing margins. Apple came through the quarter with relatively solid performance. Microsoft put to rest analysts’ worries regarding forward earnings, with strong guidance for 2023. Alphabet (Google) weathered macro issues fairly well and was similarly upbeat with guidance.

These companies received passing grades in the marketplace and assuaged shareholders to stay onboard. In the Treasury market, there have been outsized intraday swings in yield in the U.S. and European markets. More deviations will make the Fed’s job of supporting the Treasury market more difficult.

S&P500:              July+9.11%          YTD -13.34%
July+6.73%          YTD -9.61%
            July+12.35%         YTD -20.80%
Russell 2000:   
July +10.37%        YTD -16.04%

Sector Performance YTD:

Communication Services       -13.30%
Consumer Discretionary        -28.00%
Consumer Staples                     -3.90%
Energy                                      +41.60%
Financials                                 -13.80%
Healthcare                                 -6.20%
Industrials                                 -9.70%
Materials                                 -13.70%
Real Estate                              -14.60%
Technology                             -17.40%
Utilities                                     +3.30%

The highlight of the month was Fed Chairman Powell’s presentation, which appeared to be on the mark. His message made clear the Fed was up to speed on inflation, touching on the economic shifts already impacting real estate and lower oil prices. Monthly inflation results will lag in reflecting the effects of rising rates. Powell suggested the Fed Funds Rate could be at 3.25% to 3.50% by year-end, which is what investors wanted to hear. The market uptick verified the view.

Powell stated that the Fed does not believe the U.S. is currently in recession, nor is the Fed promoting such an outcome. A well-received comment. Powell’s goal is to bring inflation down while sustaining a strong labor market. There is no doubt that his comments helped to move markets out of a six-week trading range.

Earnings results for Q2 have reported better numbers than feared. Inflation ratios have started to decline in the past few weeks (though inflation still remains high) and individual stock patterns are beginning to stabilize. Price to earnings ratios have worked back to the 16.5x – 17x level. The July rally has created a more optimistic market tone.

This performance creates momentum, making retesting the June market lows less likely, though there will be price swings. We are still in the camp that believes in the possibility of delivering positive year-end results. Strong cash positions and equity selections have allowed us to stay ahead of market averages.

Clearly, the market picture has improved. The Fed has recovered credibility and Q2 profits have been supportive. High cash positions and an emphasis on stock and sector selections are still our emphasis.

June 2, 2022

June 2022 Review

The first half of 2022 was a struggle. The S&P500 posted a 20.58% decline. Bonds were little comfort as the Ten-Year U.S. Treasury price fell 13.4% and High Yield bonds retreated by close to 10%. Inflation and fear of recession dominated the narrative. The average U.S. stock ended the quarter down 30%.

S&P500:                   June -8.39%,      2nd Qtr -16.45%,       YTD -20.58%
June -6.71%,      2nd Qtr -11.25%,       YTD -15.31%
June -8.71%,      2nd Qtr -22.44%,       YTD -29.51%
Russell 2000:       
June -8.75%,      2nd Qtr -17.84%,       YTD -24.25%

Sector Performance YTD:

Communication Services -30.45% Consumer Discretionary -33.09% Consumer Staples -6.78% Energy +29.21% Financials -19.49% Healthcare -9.10% Industrials -17.49% Technology -27.25% Materials -18.69% Real Estate -21.24% Utilities -2.00%

Stocks are now closer to fairly valued. Inflation rates have declined in the past few weeks. Commodity prices have corrected along with Real Estate and Energy. Individual stock patterns are stabilizing. Price to earnings ratios pulled back to the 16.5x level in a relatively short order. In roughly two weeks, companies will begin reporting second quarter results. What will the reports look like and what will the forward corporate and analyst earnings guidance be? A softening can be expected. Analysts tend to be slow to shave corporate profit expectations and estimates for 2022 continue to rise.

We would expect at least a 10% pullback in 2022 second half estimates. The U.S. economy can handle the expected reductions. Currently, analyst estimates for 2023 for the S&P500 are $230.00ps. Following quarterly results and forward guidance, the sensitive election period will surface, and create stock market pressure.

Historically when there is a 20% market correction, the averages generally turn positive. On average, the market produces gains of 16% in the next year, and roughly 13% over the next three to five years. When a recession is involved, the markets have advanced 43% over the next five years. Despite recession, two thirds of the time strong gains are made during the one-year period.

Our view is the tide is turning. Low global interest rates with Fed and political support created excesses that resulted in exuberant valuations. Stock and bond prices were distorted. Sustainable value and normalcy is returning to the investment scene. The impact to the individual investor has been a painful process. The good news is we are recovering.

Our experience suggests that when investor patience prevails, coupled with good investment judgment, solid investment returns are delivered. The economy is stronger than skeptics attribute. Volatility will continue but we expect the second half of this year to deliver improved results.

Commentary Disclosures

The information contained in this investment research has been compiled by Garrett Nagle & Co., Inc. from sources believed to be reliable. No representation or warranty, express or implied, is made by Garrett Nagle & Co., Inc. as to its fairness, accuracy or completeness. Garrett Nagle & Co., Inc. has not independently verified the facts, assumptions, and estimates contained herein. This communication is for informational purposes only and nothing herein should be construed as a solicitation, recommendation or an offer to buy or sell any securities or product. Garrett Nagle & Co., Inc., their officers, directors, employees or clients may have a position in any securities mentioned above. All estimates, opinions and other information contained in this investment research constitute Garrett Nagle & Co., Inc.’s judgment as of the date of this investment research, are subject to change without notice and are provided in good faith but without legal responsibility or liability. Investments in financial instruments carry significant risks, including the possible loss of the principal amount invested. Past performance is not a guarantee or indication of future results.

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Founded in 1976, Garrett Nagle & Company is a boutique investment management firm specializing in managing portfolios for high net worth individuals and institutions. Based in Woburn, Massachusetts, our portfolios are separately managed and customized according to each client’s individual risk tolerance and return objectives. The firm is a Registered Investment Advisor with the SEC.

Founded in 1976, Garrett Nagle & Company is a boutique investment management firm specializing in managing portfolios for high net worth individuals and institutions.


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