04 Jul Capital 19 Catch-Up
Weekly Index Movement
| S&P500 | -2.2% |
| Nasdaq | -4.1% |
| Aussie All Ords | -0.6% |
Stocks markets fell across the board last week as investors battled a confusing set of Economic data.
But, confusing has been an understatement this year, as investors are faced with a barrage of back-and-forth moves and policy decisions that would make most fair-minded people scratch their heads. Despite the cross-currents, we hear a lot of confidence from both sides about what will go down in the second half, but even in normal times, let alone one of the trickiest economic backdrops any of us have ever experienced, few of them know.
On the subject of confusing, what are we to make of Fed policy lately? Two weeks ago in the statement following the June policy statement, officials noted that “ economic activity appears to have picked up“. Ever since then, we’ve seen a parade of weaker than expected economic reports. Just this Friday, the Atlanta Fed’s GDP Now model updated its forecast for GDP in the second quarter to a contraction of 2.1% on top of Q1’s 1.6% decline. That doesn’t look like an economy ‘picking up’ steam.
If the GDP Now Model is correct – the US economy is already in a technical recession, with two consecutive quarters of negative growth.
There’s not a lot positive to say about the market backdrop this week following one of the worst first halves for the S&P 500 in its history. The economy looks like it has taken a leg lower, the Fed is giving the middle finger to the stock market, and consumer sentiment is at levels that have only been seen at the depths of deep recessions.
Before we get into just how bad 2022 has been so far, we want to start off on a positive note. If there’s ever been a time that the market was ‘due’ to rally, it’s in the months ahead.
Q2 was the 9th quarter in the post WW2 period where the S&P fell more than 15%, and in the table below we highlight these quarters along with its performance over the next quarter, half year, and year.
Following prior 15%+ quarterly drops, the S&P has averaged a gain of 6.22% in the next quarter, a gain of 15.15% over the next half year, and a gain of 26.07% over the next year. Over the next quarter, the S&P has been higher 7 out of 8 times, with the one next-quarter decline coming in Q1 2009 (-11.67%) after the 22.56% drop in Q4 2008.
The first half was also just the eighth time since WWII that the S&P 500 dropped 20%+ in a two-quarter span, and below we highlight its performance after each of the prior occurrences.
The S&P’s average gain following prior two-quarter drops was 8.51% in the next quarter, 21.47% over the next half-year, and 31.36% over the next year.
If history is any guide, and there is no guarantee that it is, it’s not uncommon for equities to have sharp rebounds following horrible quarters and half years like the one we just experienced.
There is another reason to expect a stock rebound and that is because we have seen the first signs of inflation moderating.
The Fed is set on an extremely aggressive inflation attack. They threw 75Bps at it in June and expectations are for another 75Bps in July.
Ironically, just as the Fed pivoted ahead of its June meeting to a much tighter bias, inflation data has moderated. Thursday’s personal income and spending data showed that headline personal consumption expenditures data may have peaked, while core PCE inflation (stripping out food and energy) has steadily moderated from the highest levels of last year.
In other words, the Federal Reserve is ramping up tightening as inflation data indicates that the outlook has improved materially.
To be sure, core inflation is running well above target (just above 4%), but that calls for a different policy regime than the panicked tightening in 75 bps clips that the Fed attributes to runaway inflation expectations.
The Fed claims to be data-driven and so the recent weakness in the economy and slow-down in inflation could well lead them to back off from such aggressive interest rate moves.
Any signs that this might be the case will see stocks rally.
We’ve been a big fan of energy stocks all year but this sector hit a wall in June.
WTI broke its uptrend that had been in place since the December lows. Nat gas not only broke its uptrend, but it also crashed through both its 50 and 200-day moving averages in the second half of the month.
Given the weakness in energy products, it should come as no surprise that stocks in the sector were also hit hard, and as shown in the third chart below, the S&P 500 Energy sector also broke its uptrend from late 2021.
From the June highs through the close on Thursday, WTI pulled back 15%, Nat Gas dropped 44%, and the Energy sector fell over 22%
These moves in energy are consistent with a slowing economy. It is also just what the Fed needs to back-off from their aggressive interest rate policy. Here we have more evidence to be bullish stocks in general.
Whilst Oil prices are coming back a touch, WTI remains around $108 a barrel and refining spreads are wide. Energy companies can still generate extreme profits with margins like this so we see the 20% drop in energy stocks as a good time to buy.
Lastly today we want to leave you with this thought. Ask yourself a question:
Are you a net buyer or net seller of stocks?
What we mean is, over the next say 3 years, do you intend to accumulate more stocks or are you going to be liquidating your stocks to fund your lifestyle?
If you think your goal is to continue to accumulate stocks for your future then you should be very happy to see prices down so much this year as it means you can buy more of what you want.
If you are intending to sell your stocks then you might not be so happy and our advice would be to just sell as little as you can right now and wait for higher prices to sell more, because as bad as 2022 has been so far, we are finally seeing signs that the selling could soon come to an end.
Warning
Stock values can go down as well as up. It is possible to lose 100% of your investment in a stock. Any advice given by Capital 19 is general advice only and does not take your personal circumstances into account.