September has history of being the most difficult month for markets. Right as the real-time data was saying that inflationary was peaking and slowing, August CPI was reported worse than expected.
Equity markets fell last week with the core inflation momentum likely to force another 75-basis point increase this week. The S&P 500 fell -4.8%, with steep losses across all sectors, including over -6% drops in technology, industrials, telecom, and materials. While still above its June low, the S&P500 is down more than -10% since mid-August and again off nearly 20% since the record high set on the first day of 2022.
- The cause of the declines was firmer-than-expected Bureau of Labor Statistics August CPI report. The headline number slowed again to 8.3% y/y, but core momentum was strong on a month-to-month basis largely due to lagging wages and owners’ rents numbers.
The lack in slowdown in month-to-month core inflation momentum has thrown out hope for a 2022 Fed pivot (which we never believed) that fueled the market rally during mid-June to mid-August. Both stock and bond markets are increasingly coming to the view that the Fed will ultimately take rates above 4% to crack underlying inflation.
- While Powell has repeatedly said that the Fed and its committee is “data dependent”, the government data they review continues to show elevated and stubborn inflation. The Fed generally relies on data collected mainly by the Bureau of Labor and Statistics which has historically lagged what’s going on in the real time economy by months both on the way up and way down.
We’ve attached an interesting chart on “owners rent” and real estate costs showing the significant lag on the way up and down on what data the Fed uses. This compares versus the real time, real estate cost components such as copper, steel, and lumber and data on Zillow and other real estate sites. Catch this week 9/23, “Keeping you connected to your Money” podcast for more detail if interested.
The declines in equities year to date have been mostly caused by a reduction in valuations and P/E ratios as real interest rates have risen from negative in 2020 and 2021 to over 1.5% currently for two-years.
From an earnings perspective, consensus S&P 500 earnings growth for 2022Q3 has dropped to 5.0% y/y from 11.1% y/y in July (2nd and 3rd quarters are normally slow in the US).
Full-year 2023 expectations have dropped to 7.9% y/y from 9.3% y/y in July. The direction of earnings revisions is downward as it usually is during summer.
Technically, the S&P 500 “failed” under its 200-day moving average this summer (now 4215), and this week’s drop has it back below the 50-day average (now 4055).
Stock Talk Podcast: September Stock Market Seasonals:
News or Noise: Volatility- It’s a Balancing Act:
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