The euphoria (read: assumptions) continued on Wall Street this past week. The reason centered around the Federal Reserve’s signal that perhaps a slower pace of interest rate hikes might be a consideration going forward. Many investors, desperate for any sign that the Bear Market is really over, responded with buying enthusiasm. Unfortunately, the undisputed fact concerning Inflation – which remains at a four-decade high – is that most economists expect the U.S. to experience a recession sometime next year. There are some who believe a recession has already taken root.
Due to the heavy buying these last six weeks the market could be slightly overbought in the intermediate term and could become fully overbought in the next few weeks. This alone has the capability of throwing a right hook to investors just as they think they are seeing a recovery in the markets when they start to observe the really big players begin to quickly unload shares in their portfolios.
There are many indicators that we analyze and an ominous one concerns corporate earnings. Corporate earnings have experienced a downward trend these last months and the forecast is for earnings to become stagnant in 2023, which in turn will put more pressure on the markets causing stock prices to drop. The reason we haven’t witnessed a significant implosion in the corporate earnings sector is primarily due to the surging profits in the U.S. oil and gas companies, as a trip to the gas pumps confirm.
Bank of America produced a chart showing that U.S. stocks have tended not to hit bottomuntil after the Federal Reserve’s last interest rate cycle. This is not a hypothesis. This chart encompasses the previous seventy years!As the Fed continues to confirm, their target rate of an acceptable inflation is 2 % and at 7.75 % currently, their goal is still a long way off. We likely will not see an interest peek until mid-2023 and the first actual cut in rates until the fourth quarter of next year.
If we judged the stock market by emotion, we would have advised an immediate head-first dive back in a few weeks ago. We also read the hype and hear the jingo of the pundits. The challenge everyone, including us, is to keep your wits about you and adhere to strict guidelines which allow the smart investor to follow indicators. indexes, announcements, fundamentals and proven strategies. The players on Wall Street see the same numbers that everyone does, however some of them, in desperation, want their clients to believe that the worst is over. From our analysis there are too many indicators stating otherwise.
On Sunday, August 21st, 2022, we posted our observation which called for a transfer of invested money to cash (Money Markets). The Dow Jonesstood that previous trading day (8/19/22) at 33,706. Friday’s close (11/25/22) stood at 34,347. The S&P 500 on 8/19/22 stood at 4228. Friday it closed at 4026.It is interesting to note that the Dow Jones is now higher than it stood on August 19th however the S&P 500 is not! The DJ is made up of 30 U.S. companies. The S&P 500 has, as the name implies, 500 companies that make up that index. Which index would you think is more indicative of the market as a whole?
Technology stocks which make up the NASDAQ 100, have not followed suit in the broader market, continuing to trade near their Bear Market lows. The last two weeks have seen this index trading in a sideways manner as well. Interestingly the Index of Leading Economic Indicators is itself showing that we may already be in a recession. This is due to the economy slowing down again in October – for the eighth consecutive month! In addition to this we are witnessing a rising Consumer Price Index which roseaggressively over 7 ½ % in October. This indicates that the average American is relying on credit cards and whatever savings they have in order to pay their bills and buy groceries. Credit card debt is now the highest it’s been in the last 20 years.
30-year fixed mortgagesare at 7.65 % nationally this past week. It is becoming harder and harder for home shoppers to afford the hundreds of dollars increase on a monthly basis that these ever-increasing rates are causing. As these rates continue to increase due to the Fed’s tightening of money, the housing market will continue slowing, conceivably throughout 2023.
As stated in the Bible, everything has a season. The season we are now living is one of conserving what you have invested. Safety. There will come a time, a season, where the opportunity will be to invest in the markets once again. We will continue to analyze and monitor the causes and indicators that signal these changes and pass this information on to you every week which will allow you to intelligently and knowledgeably manage your money.
Money should be in a cash (money market) position.