November 4, 2022
October 2022 Review - Looking Forward
Stocks were flat on the last day of the month, but October posted its best performance in the DOW since 1976. The DOW added 4,007.44 points, a gain of 13.95% for the month. The S&P500 registered a gain of 7.99% and NASDAQ finished a plus 3.90%.
Growing investor anxiety over tightening monetary policy from the Federal Reserve, that showed no signs of slowing rate hikes, mounted market pressure. The market result was constant downward action.
S&P500: Oct +7.99% YTD -18.76%
DOW: Oct +13.95% YTD -9.92%
NASDAQ: Oct +3.90% YTD -29.77%
Russell 2000: Oct +10.94% YTD -17.75%
Sector Performance YTD:
Communication Services -39.5%
Consumer Discretionary -30.2%
Consumer Staples -5.9%
Real Estate -29.1%
The widespread speculation of the Fed raising rates 75-basis points this week was borne out. Chair Powell’s press meeting did nothing to assuage markets that the Fed is done in the short-term. However, the Fed minutes show a shift to not just rely on data but to acknowledge the delayed effects throughout the economy. Thus, the markets bounced initially as the feeling was that a pause may be coming after December’s rate hike. As well, perhaps December’s increase could be lower. By the time Powell was done speaking, the market had reversed course and finished down 500 points. Stamping out inflation is the Fed’s mantra. The conclusion was possibly working toward smaller increases, but for a longer duration.
The market tone has demonstrated humility in large mega-cap names. Amazon, Meta (Facebook), Alphabet (Google) and Microsoft are high quality companies in a difficult environment. The market finally came around to faulting forward overspending. October found these stocks halting and retracting as money rotated out of the Technology space. Normalizing position sizes and sector exposure has been beneficial to investors.
The October rally has been uneven. NASDAQ in particular has lagged far behind the DOW, held back by earnings misses from Tech giants. The earnings landscape, so far, has shown no apocalypse but the tone is changing. A shift from growth to value names has emerged. The reported earnings, thus far, have been better than expected but for Technology.
Chevron is the top performing stock in the DOW, up 52% YTD. Energy and Industrials have reported some of the best earnings numbers. Q3 and Q4 continue to look positive on the earnings front. We expect this Fed anomaly to settle down. Our expectation is for the Fed, with some luck, to avoid a recession. After four 75-basis point increases, the chance of a 50-basis point move in December is building.
We expected the market to claw back year-to-date losses in the last quarter. October supplied the fillip. We are stepping into one of the best seasonal months for stocks, historically. The Fed, short-term, has jostled the year-end rally. We anticipate year-end results to reflect improvement.
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%
DOW: July+6.73% YTD -9.61%
NASDAQ: 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%
Real Estate -14.60%
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%
DOW: June -6.71%, 2nd Qtr -11.25%, YTD -15.31%
NASDAQ: 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:
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.