September More of the Same

 

Seasonal Trends:

September has history of being the most difficult month for markets. 2022 continues along those historically bad seasonality trends. Since early 2022, stocks have been getting repriced on valuation alongside rising real interest rates which rose again last week.

• Equity markets fell further last week with the S&P 500 falling -4.6%. The index is now close to testing the low set in June as well as nearly flat since the 2020 election.
• The dollar strengthened Friday. This remains a headwind for the S&P500.
• Declining stocks outnumbered advancing ones by 14-to-1 ratio on the NYSE on Friday, with two stocks hitting new 52-week highs and 575 stocks hitting new 52-week lows.
• Volume was heavy. It was a bad close to a bad 2 weeks. All sectors were in the red, with energy, consumer discretionary and banks hardest hit.
• Energy stocks fell along with the move of WTI oil prices below $80.

The Federal Reserve:

The Federal Reserve stayed firmly hawkish at its September 20-21st meeting and Powell’s wording was not well received. 2022 has been a year of “Don’t fight the Fed” in an opposite way to 2h20-2h21.

The Federal Reserve raised interest rates by 75 bps last week as widely expected. However, Powell’s super hawkish tone reinforced that policy would continue to tighten and might cause some economic damage including higher unemployment. The FOMC “anticipates that ongoing increases in the target range will be appropriate”.

In the Fed’s dot plot of forward interest rate expectations, the median forecast for year-end policy rates came in higher than expected for longer. This is causing shocks across normally stable currency and government bond markets that are behind our Fed’s aggressive rate path

Further Fed increases of 100 bps in 2022 and 2023 by 87.5 bps are priced in. Recession risks have increased late this summer at the same time geopolitical tensions in Europe, Russia, and China are weighing on investor sentiment in 2022.

Battling Inflation:

Chair Powell’s opening: “Our overarching focus is using our tools to bring inflation back down to our 2 percent goal and to keep longer-term inflation expectations well anchored. Reducing inflation is likely to require a sustained period of below-trend growth, and there will very likely be some softening of labor market conditions.

Restoring price stability is essential to set the stage for achieving maximum employment and stable prices over the longer run. “We will keep at it until we are confident the job is done.”

The real-time data (commodity pricing, inflation-based interest rates, workforce participation, rents) all are pointing to the Fed already making substantial progress in their goal. However, the Fed remains focused on following 6–9-month-old, lagging Bureau of Labor Statistics.

On a positive note, the S&P500 and the Russell 2000 are now deep in oversold territory according to the most reliable momentum indicators such as MACD and RSI’s. Investor sentiment is as bearish as it has been the last 40 years according to AAII readings.

 

Stock Talk Podcast: The Fed is being “Real”ly Aggressive trying to Catch-up

News or Noise: Are Annuities Really that Boring and Bad?

 

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