The Week in Review 10/3/22
“The greatest education in the world is watching the masters at work.” - Michael Jackson
Good Morning ,
We have been saying for months that September was the “Bad Boy”… and it lived up to its reputation!Including last week's losses, the Dow, Nasdaq, S&P 500, Russell 2000, and S&P Midcap 400 declined 9.0%, 10.5%, 9.3%, 9.7%, and 9.4%, respectively, in September.
Traders seemed desperate to sell… the desperation was rooted in concerns about rising interest rates, the extreme volatility seen in currency and bond markets, and worries that the global economy is headed for a recession.
Aside from that, there was a nagging concern that the volatility across capital markets and the rapid increase in interest rates are going to lead to a "financial accident" that could have systemic implications. That worry was a major headwind and it was given some credence when the Bank of England (BoE) stepped in Wednesday to buy UK government bonds in a bid to restore orderly market conditions.
That move by the BoE was reportedly precipitated by pension funds running into trouble with derivative positions that were leading to margin calls and forced selling. The BoE was slated to begin selling gilts next week. It was forced to postpone that effort, and instead it will carry out temporary purchases of UK government bonds between September 28 and October 14.
The stock and bond markets staged a notable rally on Wednesday following the decision. The S&P 500 jumped nearly 2.0% and the 10-yr note yield pivoted from 4.00% to 3.75%.
The British pound also found some welcome support after hitting a record-low against the dollar earlier in the week when the BoE held off with any support measures, saying only that it will make a "full assessment" of matters at its next scheduled meeting. The untenable action in the bond market and mounting losses for pension funds, however, ultimately forced the BoE's hand.
The good vibes from the BoE announcement were short-lived however… on Thursday Prime Minister Truss said she will be sticking with her tax cut plan, the announcement of which last week was the source for the sharp selling of gilts and the pound.Everything that was gained on Wednesday in the stock market was given back on Thursday and then some.
There were other factors in play for yet another losing week. One of the biggest overhangs was the weakness in Apple, which dropped 8.1% last week, with most of those losses coming on Thursday and Friday. The selling was attributed to worries about demand for the new iPhone. BofA Securities downgraded Apple on Thursday to Neutral from Buy, citing concerns about negative estimate revisions being driven by weaker consumer demand.
Apple's problems bled over to other mega-cap names, as well as supplier stocks, the major indices, and a plethora of funds that hold it as a core position. The Vanguard Mega-Cap Growth ETF (MGK) declined 3.4% this week, leaving it down 10.7% for the month.
The loss of leadership from Apple weighed heavily on investor sentiment and contributed to the S&P 500 breaking down to new lows for the year. Most stocks, though, contributed to that breakdown, including Nike, which slumped 12.8% on Friday after reporting a huge inventory build (+44% yr/yr) for its fiscal Q1 and warning that it expects to face continued gross margin pressure in fiscal Q2. Nike's challenges, and an earnings warning from Rent-A-Center, added to the market's slowdown worries.
The only sector to end the week with a gain was energy (+1.8%). The remaining ten sectors recorded losses ranging from 0.7% (materials) to 8.8% (utilities).
It didn't help matters this week that most Fed officials with speaking engagements spoke to the need to keep raising rates to get inflation under control. Cleveland Fed President Mester (FOMC voter) arguably had the most damning remark for the stock market, saying that policy rates are not yet at the restrictive level. Separately, a record-high 10.0% yr/yr increase for CPI in the Eurozone seemingly solidified expectations for a 75-basis point hike by the ECB at its October meeting.
That CPI number was out on Friday along with the PCE Price Index for August. The latter showed a slight moderation in the year-over-year rate to 6.2% from 6.4% in July; however, the core-CPE Price Index, which excludes food and energy, jumped to 4.9% year-over-year versus 4.7% in July. That indication, coupled with the lowest initial jobless claims reading on Thursday (193,000) since early May, continued to stoke concerns about the Fed pursuing an aggressive rate-hike policy.
The week also ended on a down note geopolitically. President Putin announced the unlawful annexation of four Ukraine regions on Friday, as expected. That move will not be recognized by Ukraine and most other countries, but since it is being recognized by Putin, it will raise the temperature around this conflict since he has said Russia will use any means necessary, including nuclear weapons, if its territory is threatened.
Altogether it was a tough end to the week, which brought a very difficult September to a close… leaving a lot of bothersome issues unresolved and a stock market deeper in bear market territory.
Market Snapshot:
- Oil Prices –West Texas Intermediate declined 51 cents to end the day at $80.72/barrel, while Brent crude fell 29 cents to $88.20/barrel.
- Gold – Gold rose for the week but was headed to its worst quarter. Spot gold was 0.06% higher at $1,661.79 per ounce, while U.S. gold futures added 0.5% to $1,669.10 per ounce. Silver finished the week at $19.039.
- U.S. Dollar – The dollar index dropped down 0.8% at 112.17. Euro/US$ exchange rate is now .988.
- U.S. Treasury Rates – The yield on the benchmark 10-year Treasury note was at 3.829%.
- Asian shares were mixed in overnight trading.
- European Markets are trading lower.
- Domestic markets are rebounding nicely this morning.
Through three quarters, this is the fourth worst year for the S&P 500 in its history. We have experienced a tumultuous time this year and the volatility is likely to continue. Inflation still hasn’t been contained and geopolitical tensions are mounting on multiple fronts: Russia-Ukraine and China-Taiwan.
We welcome October, sometimes known as the “Bear Killer” as we have seen Bear Markets end in October in history…
According to the Stock Trader’s Almanac –- an excellent resource for historical probabilities – September is the worst month for stocks. However, October is better, particularly in mid-term election years, the worst performing year in the Presidential Election cycle (the Pre-election year is the best year for returns).
Since 1950, October has been the 7th worst month for returns. However, returns are substantially better than usual in mid-term election years, with the S&P 500 and NASDAQ returning 2.7% and 3.1% on average. Between 1999 and 2003, Octobers were big winners during the Internet bust when high-valuation stocks were similarly entrenched in a vicious bear market. The Stock Trader's Almanac writes that October "turned the tide in 12 post-WWII bear markets: 1946, 1957, 1960, 1962, 1966, 1974, 1987, 1990, 1998, 2001, 2002, and 2011."
October also ends the Almanac’s “worst six months of the year,” setting the stage for historically stronger returns. According to the Almanac, November is NASDAQ’s best month of the year during mid-term election years, returning 3.5% since 1971. Furthermore, the six months from November through April have generated an average return of 7.5% on the Dow Jones Industrial Average, versus a 0.8% average gain from May through October.
Here's to a better 4Q! Have a wonderful 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.
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