Closing Out 2022 And, It’s Still Not A Pretty Picture….

I am Chris Perras, Chief Investment Officer at Oak Harvest Financial Group, and with the Christmas weekend here, I want to keep this episode short and focus on 4 charts, tables, and data sets. Before I do, make sure you click on the subscribe button as well as the notification bell, so our team can notify you when we upload new content.

On December 16th, we released a podcast warning that our call for a 4th quarter rally should be running into resistance in both price and time due to 4 things. One, more Federal Reserve hawkish talk would be forthcoming, 2-chart technicals, 3-stock buybacks slowing into year-end, and 4- year-end tax loss selling by individuals. Well, someone out there might have seen the same things we did. We’ve sold off hard since mid that week. Here’s an updated chart of the SP500 through Dec 15th.

No, it’s still not a pretty picture. The S&P500 remains in a downtrend that was established early in 2022 when the Federal Reserve went full inflation flight. What’s amazing to me is to see the magnitude and timing of the rallies and sell-offs since the late 2nd quarter summer low. Talk about looking rigged? Someone is playing station to station. A 41-day rally from June low to mid-Aug high? A 41-trading day pullback into the October 13th low? Then a 41-trading day rally into the short-term December 13th top? That doesn’t look like a coincidence. That is a big or multiple big players trading.

And to make it even crazier. The rally in the cash S&P500 from June 17th through August 16th was 688.4097 cash S&P500 points. The rally from October 13th through December 13th including the crazy futures trading pre-open on Dec 13th around the CPI number took futures to 4180. 688.4204 points? A difference of barely .01 points? Folks. That’s computers and only computers.
So, the Fed is still on the inflation-fighting warpath even though the real-time data has the leading inflation data series dropping like a stone.

How do we know this? First, as we have previously discussed, the Fed raising short-term interest rates is quickly slowing economic growth and hurting the PE of the entire stock market. Here’s the chart of 2-year real interest rates. Also known as 2-year Tips. Easy to see, this trend has been up and to the right, since the Fed went full hawk in the late 1st quarter of 2022 and the S&P500 has remained in a downtrend.

When this yield finally peaks. The overall market should exhale. So far, that hope has been premature and the December 14th statement by the ECB made it a little tougher here in the US.
For now, the stock markets remain concerned that the Federal Reserve’s actions to fight inflation, will push the US economy into a 1st half-2023 recession whether the Fed means to or not. That’s what most Treasury bond market yield curves are saying, particularly, the ones that have been pretty accurate at forecasting future economic activity.

Here’s a chart of the 10s minus 2-year curve. It’s as inverted as it has been since the early 80’s when the economy sustained a nasty downturn. Hope, which is not an investment strategy, is that the Fed sees a moderation in whatever inflation signs they are looking at in the next 6 to 8 weeks and slows their rhetoric down.

About the only good news in this chart is that its about as bad as it gets, but it does say caution is warranted on fundamentals for companies and the economy in the 1st half of 2023.
But I don’t want to leave this podcast on a total seasonal down note, so I give you a chart of inflation. It’s a subset of the CPI that those watching real-time data wish the Fed would look at, but so far, no dice.

Remember freight rates are down. Energy prices are down, Commodity prices are down. Car prices are down. Food prices are heading down. In fact, the entire consumer goods portion of the CPI basket, ex shelter, which lags by 3 quarters, is now deflationary, not inflationary.

Here’s a chart Covid hit 2 years ago of the 3-month annualized CPI basket ex-shelter provided by Steno Research. Below zero on the graph is negative. It’s deflation. Above the zero line is inflationary. We are now negative. For what it’s worth the 10-year average for this data is 2.2%. Pretty much aligned with the Fed’s goal.

Investors remember, unfortunately, the Fed looks at slow and lagging data on the way up and on the way down. They are waiting for the jobs market to roll over and the signs of wage inflation to cool. This should happen in the first half of 2023 with the economy slowing rapidly, it’s just a matter of time.Here’s a chart showing the lag between goods and service inflation. The lag is usually measured in 3 to 6 months which would put the rollover in service inflation in the mid to late 1st quarter of 2023. Believe it or not, most companies hate firing employees.

Why? Because hiring and firing employees is a long-term investment decision for most companies and most know that hiring, firing and then rehiring employees is a very costly decision. Hiring full-time employees is supposed to be a long-term fixed investment. One measured in years or decades if done well. Laying off employees comes with business reputational costs. There are training costs and administrative costs, and few management teams want to make these hard choices unless forced to.

With the near-historic volatility of the combined stock and bond markets in 2022, our investment team recommends that you get on the phone and give our Oak Harvest concierge team a call and ask to speak to one of our advisors and planners. Set up a meeting and sit down with our team. Let us crunch your numbers and let us walk you through your retirement plan. Let us stress test your situation, so you don’t have to stress as much about your retirement years.

Give us a call at 281-822-1350 and give our team a chance to help you with your investment allocation and have our financial planning team model your cash needs, and maybe a few of your greed too, into and through your retirement years.

I’m Chris Perras, CIO at Oak harvest and from our growing team here in Houston, have a great holiday season.