Watch the CPK Market Action Report: September 2022
The markets reversed course from their rebound in July after receiving some straight talk from Fed Chairman Jerome Powell when he stated their actions “will bring some pain to households and businesses.” Just how much pain is ahead and how will it affect stocks?
Watch the Market Action Report now:
CPK Wealth Market Action Report
September 2022
INTRO TAG
The markets reversed course from their rebound in July after receiving some straight talk from Fed Chairman Jerome Powell when he stated their actions “will bring some pain to households and businesses.” Just how much pain is ahead and how will it affect stocks?
That action starts, NOW!
INDEX PERFORMANCE RECAP
Stocks posted another down month in August with the Dow Jones Industrial falling 3.8% and the S&P 500 dropping 3.83%. The Nasdaq Composite once again led the pack with a loss of 4.07%.
EQUITY UPDATE
With stocks well above 4,000, the S&P 500 was assuming virtually no earnings degradation and assigned a market multiple between 17X an 18X. That’s typical for a generally positive macroeconomic environment. We are not in a generally positive macroeconomic environment. Inflation is high, the economy is slowing, the Fed is hiking aggressively, Europe is facing major energy problems, there’s geopolitical unrest, and Quantitative Tightening is about to ramp up to a level none of us (including the Fed) has ever seen before.
So, does this mean everything is bad for stocks? No! Every time the market has sold off 20% over a couple of months, it’s ended up being a longer-term buying opportunity. Considering the risks, I just mentioned, I am keeping a close eye out for any signs that these risks are being mitigated as these could be considered as possible entry points to increase our equity exposure. Now, before you panic, take a deep breath as we may be waiting a while for that to happen.
BOND UPDATE
The bond yield curve remained inverted all month. At month end, the 5yr yielding 3.28% while the 10yr was at 3.13%. The 30yr bond finished the month at 3.25%.
It seems the 10’s-2’s spread has settled into a range of -30 to -40 basis points. While this is off the recent lows, it is still sending a clear signal that economic growth is going to slow and slow meaningfully in the coming months and quarters. If one is concerned about volatility and positioning for potential capital appreciation, I would be looking at the longer end of the curve.
COMMODITY UPDATE
Oil survived a choppy month and closed lower at $88.84. Recent news releases are being digested as bearish for oil as the threat of OPEC+ cuts were reduced, demand estimates in Europe were adjusted lower on poor data while “hot” data in the U.S. added to already hawkish money flows that bolstered the dollar and further pressured oil. The geopolitical headlines were also seen as cautious adding a headwind to oil. Looking ahead, we maintain our neutral view on WTI with support at $87/barrel and resistance between $97 and $100/barrel as the outlook for OPEC+ policy has become less certain while global central banks remain committed to getting inflation under control even if it means choking off growth and crippling demand.
Copper finished slightly lower than where it started, closing out at $3.51. The rise in real rates reflects tighter policy expectations by investors over the medium term and that is seen as restricting growth and negatively impacting demand in the months and quarters ahead. For now, copper is holding above the top end of a key support band spanning $3.45 to $3.50, and as long as that holds the macroeconomic signal from “Dr. Copper” will remain cautiously optimistic.
Gold suffered a modest decline of nearly 3%, closing out at $1,711/oz. Even though the dollar and nominal Treasury yields were stable, the spike in real rates since Powell’s speech last Friday underscores the market’s confidence in the Fed’s commitment to getting inflation down at all costs and that is a renewed headwind on the precious metal. On the charts, critical support in gold begins at $1,715 and spans down to the 2022 lows of $1,680.
CURRENCY UPDATE
The U.S. dollar rose sharply again this month to $108.72. If you are wondering why the dollar has been so strong, it is in large part because the Federal Reserve is moving at a faster pace to increase rates than other major countries. So long as this upward trend continues, stocks will face a strong headwind on any efforts to move higher.
ECONOMIC UPDATE
July job openings (JOLTS) rose by nearly a million which was much more than expected and implying the labor market is not moving in the direction of the Fed’s stated goals. There remain twice as many job openings as there are people looking for work. This puts upward pressure on wages, increasing the chances of a sustained “wage/price” inflation spiral which the Fed is trying to avoid. While it is unlikely this news has any material impact the Fed’s current plans, it does increase the chances of a .75 bps hike in September. More importantly, it also refutes the idea they may cut rates in 2023 which markets are pricing in. If that remains the case, you will see much more downside to stocks.
THE WRAP
In short, I think we all need to prepare for more of a bumpy ride for the time being. I have seen and heard all of the stats and charts indicating how oversold we are right now, and I completely agree. However, every rally we have been experiencing has hit a wall at the 200-day moving average of the S&P 500 for all of the reasons I listed at the top of the show. Historically speaking, every time this has happened, volatility has spiked higher. Currently, the VIX, which measures that volatility has been a little subdued, but that may not stay like that much longer.
So, if you are a long-term investor and you have money on the sidelines like our clients do, you are probably just fine. However, if you are new to CPK Wealth and this broadcast and are feeling a little nervous or more fearful than you like, we should probably be talking, sooner than later.
CPK FOCUS
For the month of September, the cash allocation in our equity models remains at 40% due to the model’s more aggressive nature. As I have said over the last several months, this could be increasing if we see signs of further deterioration. Again, I am proud to say that our approach has kept our performance ahead of all the major index’s year to date.
Our broad focus remains on Commodities and Domestic Equities.
For Commodities, our focus is on Energy and Agriculture.
As for Domestic Equities, our focus is on Mid Cap Value, Small Cap Value and Mid-Cap Blend with an emphasis on Energy, Consumer Non-Cyclical, Financials, Utilities & Industrial and Real Estate sectors.
CPK DISCLAIMER
As a reminder, my current allocation is not a recommendation. Regardless of what happens next, investors like you need to have a simple and yet solid financial plan that reduces RISKS, COSTS and TAXES while securing the necessary income you need to maintain your lifestyle throughout retirement.
If you don’t have a plan OR you’re not comfortable with the plan you have, call me today to get pointed in the right direction.
I’m Chad Kunc and that puts a wrap on the September 2022 Market Action Report. Thanks for joining me. It’s time for me to get back to the markets.
And that action starts, NOW!