By Pete Biebel, Senior Vice President
Print This PostI don’t know what television program was the first to warn viewers that the stunts they were about to see were dangerous, but it seems that there are more and more such offerings every year. Usually, the activities involved are so plainly dangerous that we wonder whether such a warning is even necessary. But social media is rife with examples of presumably sensible people attempting idiotic activities ending in epic failures. Many such examples are famously preceded by someone saying, “Here, hold my beer.”
Action in the stock and bond markets this year has been a reminder that managing investments can also be a dangerous activity. Maybe the cable business shows should air a similar warning. Thirty months ago, as the Covid pandemic was escalating, the stock market was falling faster than a fat kid jumping off a garage roof. It was a circumstance that caused many investors to panic and liquidate stock positions. We know in retrospect that was the wrong thing to do.
The first nine months of this year have been the worst in twenty years for stocks. So, for younger people this has been the most challenging environment of their investing history. Even highly experienced investors are likely to be flummoxed by the market’s hijinks. And the month of September only added to the degree of difficulty. It is in situations like this when investors need to turn to their financial advisors for guidance. It is in situations like this when financial advisors can provide the most value for their clients.
The major averages all ended last week at their lows of the week, the month, and the year. Last week’s losses weren’t as bad as the previous two weeks, but it was their third consecutive weekly decline. The S&P 500 Index (SPX) fell 2.92%, increasing its year-to-date loss to nearly 25%. The NASDAQ Composite Index (COMP) is now down 32.4% for the year after slipping another 2.69% last week.
The market seesawed early in the week; both SPX and COMP were showing small net gains through Wednesday. That was largely thanks to a big midweek all-day rally. The major averages all gained about 2% that day after the Bank of England announced it would begin buying U.K. government bonds in an effort to stabilize its credit markets. The rally in stocks on Wednesday was fueled by a rally in bonds. In reaction to the B.O.E. news, the yield on 10-Year Treasury notes, which reached a high near 4.0% on Tuesday, fell to 3.7% on Wednesday. That was the steepest one-day decline in that benchmark yield since March 2009.
The Wednesday rally lifted the averages to a perch from which they would plummet over the next two sessions. On Thursday morning, good news on employment was bad news for stocks. Initial Jobless Claims came in at 193,000, the lowest since March. Continuing Claims registered 1.35 million, the lowest since June. Continuing tightness in the job market means no let-up in the Fed’s hawkishness so stocks gapped lower. The averages tried moving higher early on Friday but began drifting lower late in the morning and continued to slide through the afternoon.
The turmoil in fixed-income markets is one of the characteristics currently that is adding to the challenge investors face. It has caused big swings in rates and a steep inversion in the yield curve. It has also created an opportunity for investors that hasn’t been available in the past dozen years. Yields on short-term (one to three years) instruments like CDs and Treasuries have risen to levels that present an attractive alternative for sideline cash. Compare the rates available at your local bank with what can be earned on a one or two-year CD or Treasury. That could make waiting out the volatility in stocks a little more rewarding.
As the market averages have continued to sink, the level of investor frustration has continued to increase. The American Association of Individual Investors has a long-running survey that tracks investor sentiment on a weekly basis. As of last week, the percentage of bearish investors exceeded the percentage of bullish investors by more than 40 points. The net percentage was very near that level at the market low in March. Surprisingly, it has only registered more negative readings twice in the last 35 years: October 1990 and March 2009. Many of you already know that March 2009 marked the bottom of a multi-year bear market and the beginning of a 12-year rally. 32 years ago, the extremely negative sentiment came at the end of a 20% drawdown in SPX and marked the beginning of a multi-year rally.
Another factor that may be in the bulls’ favor is that SPX closed right at its 200-week moving average on Friday. Since climbing above that average in 2011, the index has only touched it or nearly touched it three times. At its low in March 2016, SPX got to within about 1% of its 200-week average before rallying more than 50% over the next two years. It next touched that average in late-December 2018. It rallied about 30% from there in the next 14 months. In 2020, SPX plunged through the 200-week average in mid-March, reaching its low about a week later, and climbing back above the 200-week in early-April.
Where the extreme negative investor sentiment readings suggest we could see an important low in the market in the coming months, the current oversold condition in the overall stock market is hinting that at least a brief rebound rally is likely in the coming days. Many stocks of industry-leading, financially healthy companies are already trading at what seem to be bargain prices. Talk to your financial advisor about developing a plan to identify buy candidates and a basis for deciding when to start buying.
Last week, SPX fell into a band of support between 3500 (roughly the level of a 50% retracement of the entire move from the 2020 low to the January 2022 high) and 3600 (roughly the level of its 200-week moving average). So, this would be a good area from which to mount at least a brief rebound rally. However, we’re in a bear market; in a bear market, the biggest surprises are to the downside. Any new developments that rock the already fragile credit markets could cause a sudden downdraft in stocks.
This week’s calendar of economic reports looks less dangerous than those of recent weeks. We’ll get several employment updates beginning with the JOLTS data on Tuesday. The ADP and Initial Claims reports are later in the week with the Non-Farm Payrolls and Unemployment Rate numbers reported Friday morning.
Date | Report | Previous | Consensus |
Monday 10/3/2022 | PMI Manufacturing, September | – | 51.8 |
ISM Manufacturing, September | 52.8 | 52.4 | |
Construction Spending, August, M/M | -0.4% | -0.1% | |
Tuesday 10/4/2022 | Motor Vehicle Sales, September, SAAR | 13.2mm | 13.5mm |
Factory Orders, August, M/M | -1.0% | +0.2% | |
JOLTS Job Openings, August | 11.239mm | 11.150mm | |
Wednesday 10/5/2022 | ADP Employment Report, September, M/M | +132K | +200K |
International Trade, Trade Deficit, August | $70.6B | $68.0B | |
PMI Composite, September | – | 49.2 | |
ISM Services Index, September | 56.9 | 56.0 | |
Thursday 10/6/2022 | Initial Jobless Claims | 193K | 203K |
Continuing Claims | 1,347K | 1,380K | |
Friday 10/7/2022 | Non-Farm Payrolls, September, M/M | +315K | +250K |
Unemployment Rate | 3.7% | 3.7% | |
Wholesale Inventories, August, M/M | +0.6% | +1.3% | |
Consumer Credit, August, M/M | $23.8B | $25.0B |
Links to previously published commentaries can be found at benjaminfedwards.com/Latest Investment Insights/Weekly Market Commentary/Market