The Week in Review 9/26/22

“No one knows whether this process will lead to a recession.” - Jerome Powell

The month of September has been the worst-performing month of the year historically for the stock market. Unfortunately, it is living up to that historical reputation this September. Following a 4.6% decline last week, the S&P 500 is down 6.6% for the month.

2022 has been brutal year thus far… but we look forward to October, which begins the best 6 months of the calendar year historically.

The weakness hasn't been reserved for just the S&P 500. It has spread across the stock market and has been even more pronounced in other places.

The Nasdaq declined 5.1% this week and is down 8.0% for the month. The Dow Jones Industrial Average fell 4.0% and is down 6.1% for the month. The S&P Midcap 400 Index dropped 5.9% this week and is down 7.9% for the month. The Russell 2000 sank 6.8% this week and is down 8.9% for the month.

The losses mounted this week in the stock market for a variety of reasons. Rising market rates were at the top of the list. The 2-yr note yield spiked 36 basis points to 4.21% (having hit 4.26% at its high of the week) and the 10-yr note yield surged 25 basis points to 3.70% (having hit 3.82% at its high of the week).

Those moves were precipitated by central bank policy moves and a striking decision by the UK to announce its biggest tax cut in 50 years to stimulate growth while its central bank tries to battle inflation with rising interest rates.

The Fed was at the epicenter of the central bank decisions this week. The FOMC voted to raise the target range for the fed funds rate by 75 basis points to 3.00-3.25%, as many expected, and said it thinks ongoing increases in the target range will be appropriate.

That view was corroborated in the Summary of Economic Projections, which showed a median fed funds rate of 4.4% for 2022 (up from 3.4% in June) and a median fed funds rate of 4.6% for 2023 (up from 3.8% in June). The median rate for 2023 is 3.9%, implying that there is unlikely to be a rate cut in 2023.

Fed Chair Powell worsened the market's mood at his press conference, noting that his main message has not changed since his Jackson Hole speech: "Restoring price stability will require maintaining a restrictive policy stance for some time. The historical record cautions strongly against prematurely loosening policy."

He added that he thinks the Fed will get to the 4.6% rate relatively quickly and that the moves by the Fed to get inflation back down to the 2% target are likely to cause pain since the rate hikes will inevitably contribute to a weakening in the labor market.

The Fed Chair did not say it specifically, but if the price of getting inflation under control is likely a hard landing for the economy, then so be it.

In fact, a hard landing for the economy was a prominent concern for market participants this week. It led to broad-based selling, rooted in worries that there will soon be large cuts to earnings estimates. Accordingly, there was a reticence to pay up for stocks and an inclination to take risk off the table.

Losses for the 11 S&P 500 sectors ranged from 2.2% (consumer staples) to 9.0% (consumer discretionary). There was a definitive trend of underperformance, however, in the more economically-sensitive parts of the market. The consumer discretionary sector fell 7.0%, the real estate sector declined 6.4%, the materials sector decreased 5.7%, the financial sector sank 5.6%, and the Philadelphia Semiconductor Index dropped 6.0%.

Other central bank moves this week included 50-basis point increases by the Bank of England, the Norges Bank, and the Bank of Indonesia. The Swiss National Bank, meanwhile, increased its key policy rate by 75 basis points to 0.50%, exiting a negative policy rate domain for the first time since 2015.

The Bank of Japan bucked the rate-hike trend. It kept its key policy rate unchanged at -0.1%, and Governor Kuroda said the bank does not expect to raise rates soon. Hoping to fend off a further weakening in the yen, Japan's Ministry of Finance intervened to support the yen for the first time since 1998.

That move was met with limited success given the exorbitant interest-rate differential that remains between the Bank of Japan and many other central banks, namely the Fed. The British Pound was another hot spot in the currency market. GBP/USD plummeted 3.5% on Friday to 1.0856, hitting a 37-year low, as traders did not take kindly to the UK's fiscal stimulus plan and understanding that it will require the issuance of more debt.

For the week, the U.S. Dollar Index surged 3.0% to 113.04.

There was no surge for the stock market, however. On Friday, the Dow Jones Industrial Average took out its June low (29,653.29) and the S&P 500 traded below its June closing low (3,666.77) while managing to hold above the intraday low on June 17 (3,636.87).

On a related note, Goldman Sachs cut its year-end price target for the S&P 500 to 3,600 from 4,300 and said its sees downside potential to 3,150 in the event of a hard landing. That was one more item weighing on investor sentiment on Friday, and it helped to round out another losing week for the stock market. Goldman has been one of the more optimistic voices in the markets this year and this seems like capitulation.

Market Snapshot…

• Oil Prices –West Texas Intermediate fell $4.45 to end the day at $79.10/barrel for a 5.3% loss, while Brent crude futures were down $4 or 4.4% and settled at $86.46/barrel.
• Gold – Gold prices dropped over 1.5% to their lowest since April 2020. Spot gold was down 1.6% at $1,643.51 per ounce, while U.S. gold futures fell 1.8% to $1,651 per ounce. Silver closed out the week at $18.91.
• U.S. Dollar – The dollar index has risen 3.1% this week to 113.16. Euro/US$ exchange rate is .972.
• U.S. Treasury Rates – The yield on the benchmark 10-year Treasury note hit an 11-year high of 3.685%.
• Asian shares were down sharply in overnight trading.
• European Markets are trading down.
• Domestic markets are again trading lower this morning.

Right now, many strategists have 2023 S&P earnings at $240, which is probably too high. We have learned from Dow and FDX that estimates may have to come down. So, let’s drop it to $220 or even $200. Then we have to pick a P/E multiple and whether we pick 15, 16, 17, or even 18 we get an S&P 500 fairly valued at somewhere between 3000 and 4000.

The good news is that we believe we are in the midst of a fantastic buying opportunity.

It’s impossible to pick the exact bottom, but historically this has been a most difficult year with the S&P 500 losing 23%+, and the NASDAQ off a whopping 31%. In history, these periods have offered great opportunity!

We invest in dividend growth companies and that’s a nice hedge against inflation. We get paid while we wait for better times and feel they are right around the corner!

We have certainly paid our dues this year… 4Q should give us some well-deserved selling relief as we see what previous rate hikes have accomplished against inflation.

Have a good week!

The opinions expressed herein are those of Michael Hilger and not necessarily those of Raymond James & Associates, Inc., and are subject to change without notice. The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. There is no assurance any of the trends mentioned will continue or forcasts will occur.  The information has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete. Investing involves risk and you may incur a profit or loss regardless of strategy selected.

The information contained herein is general in nature and does not constitute legal or tax advice.  Inclusion of these indexes is for illustrative purposes only. Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor's results will vary. Past performance does not guarantee future results. The Dow Jones Industrial Average (INDU) is the most widely used indicator of the overall condition of the stock market, a price-weighted average of 30 actively traded blue chip stocks, primarily industrials. The Dow Jones Transportation Average (DJTA, also called the "Dow Jones Transports") is a U.S. stock market index from the Dow Jones Indices of the transportation sector, and is the most widely recognized gauge of the American transportation sector.  Standard & Poor's 500 (SPX) is a basket of 500 stocks that are considered to be widely held. The S&P 500 index is weighted by market value, and its performance is thought to be representative of the stock market as a whole.   The NASDAQ Composite Index (COMP.Q) is an index that indicates price movements of securities in the over-the-counter market. It includes all domestic common stocks in the NASDAQ System (approximately 5,000 stocks) and is weighted according to the market value of each listed issue. The Russell 2000 index is an unmanaged index of small cap securities which generally involve greater risks.

Investing in oil involves special risks, including the potential adverse effects of state and federal regulation and may not be suitable for all investors.

International investing involves special risks, including currency fluctuations, differing financial accounting standards, and possible political and economic volatility.

The companies engaged in the communications and technology industries are subject to fierce competition and their products and services may be subject to rapid obsolescence.

Gold is subject to the special risks associated with investing in precious metals, including but not limited to: price may be subject to wide fluctuation; the market is relatively limited; the sources are concentrated in countries that have the potential for instability; and the market is unregulated.

The information contained within this commercial email has been obtained from sources considered reliable, but we do not guarantee the foregoing material is accurate or complete.

Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Prior to making an investment decision, please consult with your financial advisor about your individual situation.

Charts are reprinted with permission, further reproduction is strictly prohibited.