2nd Half Outlook Part 2 | Stock Talk Podcast
The first half of 2022 is behind us. It was abysmal in the markets. We suffered the first true correction since the Covid crash in the first quarter of 2020. However, we also extended that downward to the first -20% bear market drawdown in years. But the question is now? What’s in store for the second half of 2022 and the first half of 2023? Are “THE” lows in for 2022?
I am Chris Perras with Oak Harvest Financial in Houston, and welcome to our weekly stock talk podcast, keeping you connected to your money. Before we get into this week’s topic, the second part of what does the rest of 2022 look like? “Where do we go from here?” Please take a moment to click on the subscribe button and click on the notification bell so you will be alerted when our team uploads our latest content. Much of this and the next few weeks content will be part of a Friday, August 19th, YouTube live stream our team is doing on our second half market outlook. Take a moment and preregister if interested.
Are the stock market lows in for the year? Is this year’s correction and “bear market” decline behind us and in the rear-view mirror for good? Was June 16th the low for the stock markets for 2022? Those are the questions on almost everyone’s mind. And while no one, including myself, can say so with absolute certainty, that yes, the lows are in for the year, we first presented our case for this on July 1st, with our video release, “Opportunity knocks early.” The data has been saying that “yes,” those are the odds that it was “The Bottom.” The correction and bear market of 2022 are likely in the rear-view mirror.
While we do think the data indicates June 16th was likely THE low for the year, and while we expect more monthly volatility throughout year-end, it should be much calmer than the first half. We expect the “buy the Dip” institutional crowd to re-enter the market on moves down of only 3-5%. Leading inflation indicators were headed south already into August 10ths CPI print which came in under expectations and flat month to month. And with that, the S&P500 extended its 2-month rally over 4225. The yield curve steepened, in a bullish fashion. Short-term rates, which the Fed controls, dropped, and longer-term rates that the markets control rose. Those are goldilocks types of macro moves for stocks if they continue in a sustained yet, gradual fashion.
What’s the upside for the S&P500 in the second half? It could recover to nearly flat on the year in the range of 4700-4800. Exiting the year with positive momentum and sentiment on the way to a 5100+ first half 2023 high. All these moves would be normal for a mid-term election year.
Frequent viewers will recognize many of the charts that I’ll be using as background material, but here goes. We talked technical and charts last week. We talked about the chart of the S&P500, and Nasdaq Indexes. I also discussed real interest rates and forward volatility. All were set up in positive, bullish formations for the second half of 2022.
Before I get into the heart of this week’s material, I want to say something briefly on inflation. Many on T.V. are surprised by the markets moving up in front of even the hint of slowing inflation with government statistics. I will preach my belief on this matter once again. Waiting or trading on government data, will do you virtually no good except make you late to the big moves that better real-time traded data most often sees in advance. Milton Friedman famously said, “Inflation is always and everywhere a monetary phenomenon in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output.” Take a look at the chart of our money supply as measured by M2 versus inflation as measured by CPI.
One can clearly see there is a strong correlation, albeit with a lag, over the last 25 years between money supply growth and domestic CPI. Money supply growth peaked over a year ago and has collapsed. Expect the CPI to follow this pattern lower in the 4th quarter 2022 and the first half of 2023. Which, of course, would be? Great for stock market valuations.
Next, I’m covering the dollar. This, too, has a bullish setup for stocks for the second half of 2022 through the first half of 2023. Remember that while USA consumers love a strong dollar, it makes purchasing goods cheaper and traveling overseas a windfall. The overall S&P500 would like a gently trending weaker dollar, not stronger. Why? A weaker dollar makes overseas sales more valuable when converted back into U.S. currency. With estimates of between 40 percent to 50 percent of S&P 500 sales being abroad, particularly in growth areas like technology, many of the largest and most profitable S&P500 companies have felt a massive headwind to their businesses in the first half of 2022. Why? The U.S. dollar as measured by the DXY Index, made a historically fast and steep rally like 2014. Major tops in the dollar such as the first half of 2017 and the first half of 2022, have been followed by major rallies, as high as 40% plus, in the S&P500 that lasted close to a year. The current top in the U.S. dollar looks to be patriotically on the July 4th weekend. The S&P500 stood at 3750 then.
+40% from the July 4th weekend would be material new all-time highs in the second quarter of 2023.
The third topic for the week is how positive the breadth of the market has been since the second half of 2o22 began. Breadth, remember, in its simplest form, is what percentage of stocks in a given index are green on your screen versus red. When more stocks are participating in a rally. When it is broad based. It’s a good thing. On Tuesday, July 19th, a month after the Fed’s first 75 basis point interest rate increase, market breadth exploded upward. Breadth thrusts like these do indeed historically single upward turns that last for months and quarters, not days and weeks. The advance-decline of the broad NYSE was 14 to one after an 8 to one reading the prior Friday, option expiration for July. Data on the S&P500 was equally as broad with 495 stocks up and 10 down for the broadest breadth since the Dec 26th Christmas rally in 2018.
According To market research from Sentiment trader, there have been only 13 times in the modern era that the S&P500 up volume was 87% or more for 2 out of 3 trading days coming off a 52-week low. In all 13 cases, 100% of the time, the S&P 500 was higher a year later with a median return of 23%. Those odds say that June 16th was the low for 2022.
Then again, on August 10th, the same day the CPI reading came out, breadth exploded again to the upside. It was 10-1 on the SP500, 7-1 on the NYSE, and 7-1 on the Russell 2000.
Finally, we must remember that if you believe in seasonality and market cycles, we are close to entering the most bullish time frame of a Presidential cycle. Remember, regardless of which party is controlling the presidency, the 4th quarter of the second year of a Presidency through the 3rd year have historically garnered above average stock returns and the majority of the 4-year performance. Why? Because it’s usually the “dead-zone” where the existing President and Congress neutralize each other and get little to nothing done. They “do no harm” or at least they do less harm. It’s even better when the power in D.C. is split. Take a look at the chart from Merrill Lynch of the S&P500 Presidential Cycle and also a Decennial cycle for your study. As you can see, historically, the markets bottom in the June to August time frame and move higher for the next 12 to 15 months.
We first started discussing this dynamic way back in the 3rd quarter of 2021. I’m sure we will be addressing it again in the coming months as we get closer to the Mid-terms in November; however, here is the historic quarterly data once again from the research firm CFRA. We’ve highlighted the important quarters in yellow for you.
So that’s it for our second half 2022 outlook. What’s interesting is that “net,” not much has changed since the beginning of the year for our 2022 annual outlook. The data we look at still indicates the market will be near flat on the year, maybe down a bit, but exiting on a high note. Our analysis of the first half of 2022 provided early warnings of the first correction since covid but underestimated the magnitude of the downside move. However, what’s interesting is that at 4200 we sit? Down -12.5% year to date. And we are now sitting near the same level we hit? The end of January, mid-March, and Tax Day. Yes, we’ve already recovered almost all of the last four months down in the S&P500. Such is the pattern of most corrections and even most “bear markets.”
Unless the Fed decides to crush the economy in the 4th quarter or China invades Taiwan unexpectedly, we expect FOMO to slowly creep into portfolio managers feelings as we exit the 3rd quarter after a relatively weak earnings season, which is generally very normal for the summer. Yes, FOMO, the fear of missing out, is more likely to return in the second half of 2022 than FUD, Fear, uncertainty, and doubt. It’s just normal investor behavior.
Was June 16th “The Bottom” for 2022? Time will tell. But as we have tried to present since our July first video titled “Opportunity knocks early”, many green shoots for stocks have started to appear after a treacherous first half 2022 beginning. Unless you think it’s the beginning of Great Financial Crises part 2 or Dotcom bust round two in 2000, the odds are low that the markets have NOT already put in the lows for 2022. And Federal reserve willing, come the 4th quarter, more commentators on T.V. may be singing to the tune of Elton John’s 1974 hit, “The Bull is Back.”
If the ongoing market volatility is making you feel uneasy, give us a call, and schedule a meeting with an Oak Harvest advisor. Our team does have insurance-based tools that do not have the volatility of public markets. However, we remind you, that these investments may also have lower long-term expected returns.
At Oak harvest, we think our clients are best served by us helping them plan for their future needs, instead of focusing on the past. The future and stock markets are always uncertain and that is why our retirement planning teams plan for your retirement needs first, and your greed’s second.
Give us a call to speak to an advisor and let us help you craft a financial plan that helps you meet your retirement goals. Call us here at (877) 896-0040 and schedule an advisor consultation. We are here to help you on your financial journey into and through your retirement years.
I’m Chris Perras, and from everyone here at Oak Harvest Financial Group, have a blessed weekend.
CFA®, CLU®, ChFC®
Chief Investment Officer, Financial Advisor
Chris is a seasoned investment professional with over 25 years of experience working with some of the most successful money management firms in the world. Chris has made it a point in his career to adapt as the market landscape changes, seeking to utilize the appropriate investment strategy for a given market environment. His transition from managing billions of dollars at the institutional level to helping individuals and families retire is guided by a desire to see first-hand the impact he is making in the lives of clients at Oak Harvest.