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Capital 19 Catch-Up

Weekly Index Movement

S&P500-2.9%
Nasdaq-3.0%
Aussie All Ords-1.6%

Wall street closed out a terrible week, month and quarter that brought the S&P500 to a new 2022 new.

The low of 3666 was broken on Friday as the index finished the quarter on a new low for the year of 3585. At one point this quarter, the S&P 500 was up as much as 14.3%, before closing the period down 5.3% on Friday

September did not fail to live up to its reputation as historically terrible for stocks. On Friday, Dow tumbled 8.8% for the month, while the Nasdaq lost 10.5%. The S&P 500 fell 9.3% in its worst month since March 2020 during the onset of the Covid-19 pandemic.

You know the reason for all this selling. It is the same as I have been writing about for months now.

The market is concerned the Fed is going to push the economy into a recession.

But, and this is important to realise for your investing decisions, it is only a fear right now. It might not happen. We might find inflation normalises and the economy continues to grow. If that happens, stocks are extremely cheap right now.

I am actually quite enjoying all this selling. Whilst it isn’t enjoyable to see your portfolio value fall, I know it is only temporary and it will recover. It always has and always will. I’ve just got to wait for it to happen.

But all this selling does give me the opportunity to buy quality companies at cheap prices. This is why it is always important to have some cash lying around, to take advantage of such times.

The Fed seems determined to continue to push stock prices down even more and their change of rhetoric has been amusing me.

Remember earlier this year when the Fed was telling us tighter monetary policy would have little impact on the health of the economy? That changed to a “softish landing” which became “some pain” and then “No one knows if this process will lead to a recession”

They have now gone one step further with Cleveland Fed President Loretta Mester saying “recession won’t stop the Fed from raising rates”

It seems the Fed has given up and is now targetting a recession. That’s fair enough. It is the only thing that can stop inflation.

The problem is corporate America is not helping. They keep raising wages. That gives people more money to spend and so they do. The problem is the employee has too much power.

Take GM. They tried to force all employees back into the office three days a week. But quickly backed down when staff told them they would rather resign than do that. So management sent a company wide email saying they have decided not to enforce it.

When those same employees say “I want a pay rise” it will also happen.

I’m not really sure when this cycle will break. Only when it does will inflation break too.

Initial claims for unemployment insurance came in at 193,000. This is the lowest reading since late April and shows Fed monetary policy has not yet even started to have a measurable effect on the US labor market.

In other worrying inflation news, there was a story this week that OPEC+ might cut production to push oil prices back up.

Buy oil and gas companies now. Stock prices are down as Oil fell from $120 to $80 but it looks like the cartel wants to make more money and send oil back to $100.

All this selling over the last few weeks got me thinking about what fair value for the S&P500 is.

Scenario 1: S&P earnings of $220 per share (current run rate, no drop in earnings due to recession)

PE 15 (low investor confidence) = 3,300

PE 17 (average confidence) = 3,740

PE 19 (high investor confidence) = 4,180

Scenario 2. S&P earnings of $198 a decline of 10% due to slight recession

PE 15 = 2,970

PE 17 = 3,366

PE 19 = 3,762

Scenario 3. S&P earnings of $176 a decline of 20% due to full recession

PE 15 = 2,640

PE 17 = 2,992

PE 19 = 3,344

Comment: At 3,585 the S&P is closest to a mild earnings recession with slightly above average investor confidence.

On the one hand that is very comforting. The market has discounted a fall in company earnings but remains confident of the future.

On the other hand, if things get really bad, stock prices could fall by another 20% before it is all over and done.

Wall Street analysts expect the S&P to deliver earnings of $55.51/share for Q3. Companies will start announcing next week

$55.51 is 3.0% higher than Q3 of 2021.

Given companies usually beat by 3-4 percent, the number could come out at $57.70, which would be higher than the all-time record of $56.87 set in Q2, 2022.

All of which is very encouraging.

Given how oversold stocks are right now, I am expecting a bounce to start as companies announce earnings. We could easily add 15%-20% and make it a tradeable move. But it won’t be a long-term move higher. That won’t happen until inflation falls or the Fed pivots.

The best place to hide right now is in dividend-paying stocks. There will always be a floor under their price due to the income they provide and you get the added benefit of collecting the dividends while you wait.

Our Dividend Growth stocks are perfect for this.

CatchUp Stock Tips

The relentless selling has seen our stocks fall more but with earnings just around the corner we are looking for a recovery to start very soon

Buy DateBuy PriceCurrent PriceGain / LossStop Loss
TXN1 Aug 22177.94154.78-13.0%145.00
ASC8 Aug 228.529.13+7.2%6.40
CDNS15 Aug 22188.83163.43-13.5%130.00
UNH22 Aug 22541.39505.04-6.8%450.00
GMS5 Sep 226.505.88-9.5%4.00
AAPL12 Sep 22159.59138.20-13.4%130.00
CRK19 Sep 2218.2217.29-5.2%12.00
AJL27 Sep 220.120.11-8.3%0.09

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.

Disclaimer: Capital 19 Pty Ltd ABN 17 124 264 366 AFSL 441891 (‘Capital 19’) believes the information contained is reliable, however, no warranty is given as to its accuracy and persons relying on this information do so at their own risk. This communication is for general information only and was prepared for multiple distributions and does not take account of the specific investment objectives of individual recipients and it may not be appropriate in all circumstances. Persons relying on this information should do so considering their specific investment objectives and financial situations. Any person considering action based on this communication must seek individual advice relevant to their circumstances and investment objectives. Subject to any liability which cannot be excluded under the relevant laws. Any opinions or forecasts reflect the judgment and assumptions of Capital 19 and its representatives based on information at the date of publication and may later change without notice. Any projections contained in this presentation are estimates only and may not be realised in the future. The investment manager certifies that all the views expressed in this document accurately reflect their views about the companies and securities referred to in this document and that their remuneration is not directly or indirectly related to the views. Capital 19, its directors, representatives, employees or related parties may have an interest in any of the companies and securities in this document and may earn revenue from the sale or purchase of any financial product referred to in this document or any advice. Past performance is not a reliable indicator of future performance. Unauthorised use, copying, distribution, replication, posting, transmitting, publication, display, or reproduction in whole or in part of the information contained in this document is prohibited without obtaining prior written permission from Capital 19.