S&P500 – Are The Lows In? | Stock Talk Podcast
Are the stock market lows in for the year? Or is this another “bear market” rally? Is this year’s correction and “bear market” decline behind us and in the rear-view mirror for good? Was June 16th and 17th the low for the stock markets for 2022? Those are the questions on almost everyone’s mind and the ones we are getting asked at Oak Harvest on the investment side almost daily. And while no one, absolutely no one, including myself or any other strategist, economist, or portfolio manager, can say so with absolute certainty, that yes, the lows are in for the year, we wanted to present some additional data following up on our July 1st podcast title “Opportunity knocks early.” This data has been saying that “yes,” there are good odds that it was. Unless you think we are on the verge of another 2008 Great Financial Crises or 2000 DotCom bubble collapse, the data is aligned in saying the worst may be over. However, I remind you that even if this happens to be the case, and June 16th was THE low for the year, 2022 still does not look like a V-bottom year, and expect a few more months of uncertainty and volatility in the overall markets.
I am Chris Perras with Oak Harvest Financial Group in Houston, Texas, and welcome to our weekly stock talk podcast. Before we get into this week’s topic, “did I miss the lows?” 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.
The economic data has been consistently missing expectations now for months. The Federal Reserve met again last week and raised short-term interest rates by another 75 basis points. And then the next day, the second quarter GDP figure was released with the second consecutive negative quarterly number. In my book, the old school ones, that’s the definition of a recession. And while politicians, economists, and academics might argue the semantics, it’s the definition that almost every money manager who looks at historic data uses. So certainly, the stock market plunged on all this bad news? Certainly, waves of stock selling came into the markets. Nope, the S&P 500 hit 4100 as I penned this podcast. Up almost 475 points from the Fed’s first 75 basis point increase in rates on June 16th. The markets are now approaching mid-May levels.
Frequent viewers will recognize many of the charts that I’ll be using as background material, but here goes. The most important piece of real-time data and the chart that few people talk about is “real interest rates.” Some people call this the real yield. This isn’t the one people talk about on TV. This isn’t the one that your mortgage is calculated off. You add market pricing of inflation to the real yield, and you get the nominal yield that everyone quotes on TV. You get the 10-year Treasury yield that is the starting point for most mortgages. This real yield is perhaps the single most important chart you will see. Why? Because the “real yield” is used to calculate equity risk premium, which translates almost directly into PE multiples in stocks. Here is a chart of the 10-year real interest rate for the last two years. Let this chart sink in.
The overall stock market went generally higher all of 2021. Remember way back then, when traders were speculating on every 4-letter name mentioned on Reddit? Well, this was the general trading behavior until November, when the real yield component of long-term interest rates began rising. This was almost the same timing as the Federal Reserve becoming finally ok with raising rates and tightening financial conditions. Since then, ex a brief downturn in the real yields in late March, which drove a rapid stock market rally into the end of the first quarter, the real yield rose almost weekly until? Spot on June 16th, when the Fed announced their first 75 basis point increase in rates since November 1994. Since that meeting, the trend in real yields has been down, and the trend in the stock market has been? Up.
What have been the best performing groups since June 16th? The growth areas of the stock market; Technology, healthcare, consumer discretionary, and consumer staples, as overall nominal interest rates have also declined. The worst performing groups? The short cycle value plays; Energy and materials. With so much of the S&P500 index weighted toward technology, discretionary and other growth areas, the overall market needs to continue to see at least stable real interest rates if not slightly declining to continue its recovery in the second half of the year.
Year to date, the volatility of the overall markets has made many retirees and other stock investors anxious while making short-term traders very happy. Short-term traders love quick and rapid moves. While presenting greater long-term investing opportunities, most retirees like gentler price moves. We previewed way back in November of 2021 that the first half of 2022 was likely to be a sloppy, choppy, volatility-filled mess. No, back then, we didn’t know about the Russian and Ukraine war. No, we could not forecast that inflation would get above 8% or that markets would drop quickly past correction levels into bear market territory. Nor could we foresee that the Federal Reserve would raise short-term interest rates twice by 75 basis points in only a month. No one has that crystal ball. However, we do have some tools that historically work pretty well at looking forward and seeing sloppy, choppy, messy time periods.
And for the first time since last November, some rays of light are slowly shining through the volatility clouds. Our team often talks about volatility in the markets. However, we focus on forward volatility, months into the future. In time periods, that extend largely beyond the noise of intraday, or day to day, or week to week. Volatility out in future months is a real tradeable figure. Unlike spot volatility, which is the figure quoted by the Vix and most people on TV, these forward volatility tools are tradeable and are used to hedge big institutional portfolios. When these big players are nervous, they tend to leave clues and tracks in their hedging of portfolios or unwinding those positions to get more bullish on markets. Here is the chart of forward volatility four months out in the future.
As you can see, since late fourth quarter of 2021, This chart has been up and to the right. It made higher highs and higher lows each wave up, until? Yes, that same week in June. You can see the peak in mid-May and a peak on June 14th at the same level. For the first time in 10 months, forward volatility stopped making higher highs. And in mid-July, volatility broke to the downside. This is bullish. No, this doesn’t mean volatility is gone for the rest of the year or the markets revert to the calm level of 12-12.5 on spot volatility as it has in past boring economic cycles and bull markets. However, what it does likely mean is that future volatility spikes will likely be sold, and dips in the stock market in the 2nd half will be bought.
We’ve had many clients ask about the Federal Reserves aggressively raising rates while inflation is high, and we are technically in a recession. Here’s that data once again in a table. Pay particular attention to the highlighted time period in 1974. We were in a recession; inflation was high, and the markets screamed higher for the next nine months rallying over 50%.
The last time the Fed hiked by 75 basis points prior to June 16th of this year was December 1994. Here’s a chart of what the SP500 did post that rate increase? Up over 40% post the first 75 basis point rate increase the next 12 months. Seems positive too me.
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 signal 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 Xmas rally in 2018. Both The S&P 500 and tech-heavy Nasdaq reclaimed their 50-day MVA’s, which is a start at repairing the damage to the technical charts that people like to see.
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.
History tells us that stocks do a lot of the repricing work in front of recessions because stocks anticipate slowdowns. They anticipate peak revenue growth. They anticipate peak margins. Likewise, stocks also anticipate troughs in fundamentals and troughs in economic momentum. They bottom in front of the worst of the data, usually by months, not by hours, days, or weeks. The government data reported on TV lags. It’s stale and almost never helpful in managing one’s investments. There are usually better real-time data series, almost all free to the public, that have been more accurate historically and are leading indicators to help one make tactical investment allocation decisions if one is so inclined.
Going forward? Are we in a recession? That debate will linger for months, particularly heading into the mid-term elections. However, If you look at recessionary contractions as the worst economic data we can have in the market, here’s Ben Carlson’s work on what happened to the stock markets before, during, and after every recession since World War II.
History would say that the two consecutive negative real GDP quarters that have now been reported could be the start of the end of the bear market, and not its beginning.
This is just some of the historical evidence showing investors that stocks and markets anticipate inflection points, both good and bad. It should tell an investor, if you wait to see the whites of their eyes; If you wait for the sky to be perfectly clear; You’ll be late to action.
Was June 16th “The Bottom” for 2022? Time will tell. Time measured most likely in months, not days. Most likely into September and October. But as we have tried to present since our July first video titled “Opportunity knocks early,” many of the tea leaves that signal green shoots for stocks have finally started to appear after a treacherous first half of 2022. But we warn you again. Straight lines higher in the markets are unlikely, yet.
Our team here at Oak Harvest knows that the first half of 2022 has been a trying time for investors and retirees. We know that sharp market moves drive emotions and the urge to make changes to what are supposed to be longer term asset allocations should be worked through with your advisor.
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.