08 Oct Capital 19 Catch-Up
Weekly Index Movement
| S&P500 | +0.5% |
| Nasdaq | +1.8% |
| Aussie All Ords | -1.5% |
Treasury yields ripped higher this week as the economy showed continued strength, particularly after a surprising increase in job openings. The yield on the 10Yr treasury surged to over 4.8% which is the reason stocks have been weak for a few weeks.
September lived up to its reputation as the worst month of the year, but it’s over now, and October has historically been a much better month. Since 1945, the S&P 500’s average performance in October has been a gain of 1.1% with positive returns 62% of the time. Along with October, November and December have both averaged gains of 1.5% with positive returns at least two-thirds of the time.
October kicks off what has historically been the best four-month period of the year for stocks with the S&P 500 averaging gains of over 1% in each month from October through January. October is also known as the month of market bottoms. Of the 60 market corrections (declines of 10%+ without a 10%+ rally in between) since 1945, 18 of them have bottomed during October.
I think the same thing will happen this year. You can start your buying now. Concentrate on Tech and Consumer Cyclicals.
Stocks have lost ground because rates have increased. But rates will not continue to increase forever. At some point they will top out and that will remove the headwind stocks have faced. It is entirely likely rates are exhausted and have already peaked.
If rates start falling stocks will really take off. It is probably too early for that to happen yet, but it will at some point.
It is curious that the bond market is finally paying attention to the Fed. Powell has said rates will be higher for longer consistently all year but the market ignored him and continued to price in cuts in 2024. It has now unwound those cuts.
But as we all know, the Fed’s forecasting isn’t exactly accurate. Remember when rates were going to stay at 0% until 2024? They got that very wrong so who is to say their no cuts in 2024 will be any more accurate.
Bond investors are probably hoping the above statement is very true.
For years, a generation of investors have been brought up on the premise that US Treasuries are a safe-haven asset. Sure, a basic understanding of bond math should be sufficient to understand that longer-term treasuries are more leveraged to moves in interest rates, but all things considered, if you wanted to park your money, treasuries were the way to go.
There’s nothing like experience to teach a lesson, and that generation of investors is learning firsthand that nothing is guaranteed in life. Right now, if you’ve been holding long-term Treasuries since yields were at historic lows, you’re sitting on big losses unless you hold them to maturity.
The iShares 20+ Year US Treasury ETF (TLT) is at new lows and down 51% from its all time high in August 2020. While that’s not quite as large as the 57% decline that US equities experienced in the financial crisis, it’s more than the 49% decline experienced by the S&P 500 during the dotcom bust. Treasuries riskier than stocks? What has this world come to?
I would not advise stepping in front of this train and buying TLT though. If oil pushes to $100 a barrel, as Bank of America is predicting, then inflation will tick higher once more and the bond market will fear a repeat of the 1970s when rates went to 14%.
Back home in Australia the RBA kept rates steady at 4.1% as the new committee elected to take a wait and see what happens approach. From what I’ve been hearing from people in the construction industry and farming this is the correct decision. I am hearing many stories of a contracting economy and consumers really reducing their discretionary spending.
This, obviously, is what the RBA wants to reduce inflation but it does put the economy on a knife-edge and if something breaks, recession will quickly follow.
Mind you, a recession is nothing to fear. Stocks will sell off initially but companies will cut expenditure and make themselves much more efficient. The RBA will cut rates and stocks will rally because earnings will quickly improve due to the new lean company structures.
A recession is just what we need to sort things out. The stock market rally that follows it will be tremendous.
Auto Workers Strike A Real Problem
The UAW still hasn’t agreed terms with Ford and General Motors. GM said it has cost them $200 million in sales so far.
GM stock is down 50% from its 2022 highs
GM is in such a state it had to go out and secure a new $6 billion line of credit. The new line of credit is “prudent” to bolstering GM’s balance sheet amid expectations that the union may expand and prolong strikes against the company, GM CFO Paul Jacobson said.
Unions never fail to surprise me. Who comes up with these plans? Did some guy sit down and say, I’ve got a great idea. Let’s strike so the company that employs us gets in financial trouble and might even file for bankruptcy again and cut half the workforce and we all lose our jobs.
Clean Energy A Good Investment?
The S&P Global Clean Energy Index measures how the thirty biggest renewable energy companies are doing, and right now, they could be holding up a whole lot better. Down just over 20% from only two months ago, the index looks like it’s headed for its worst year in the last decade. That’s probably because major green energy firms lock in prices way ahead of time with long-term contracts, which isn’t ideal at a time when rising interest rates are pulling up their costs and making their borrowed cash more expensive to pay off.
I’ll stick with my dirty oil and coal companies that pay me massive dividends.
Next Week
I have been looking forward to this week arriving as it will kick off Q3 earnings with reports from Citigroup, JPMorgan Chase, Wells Fargo, BlackRock, UnitedHealth Group, PepsiCo, and Delta Air Lines.
In addition we will get the inflation report for September. The CPI is anticipated to have risen by 0.3% last month, a decrease from the 0.6% increase seen in August, while the core index is expected to have increased by 0.3%. Additionally, the headline annual inflation rate is expected to slow slightly to 3.6%. Furthermore, investors will follow the release of FOMC minutes, speeches by several Federal Reserve officials, Michigan Consumer Sentiment, producer inflation data, and the government’s monthly budget statement.
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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 and might not be suitable for you.