Last Week On Wall Street
new 2022 lows last week. The Dow Jones Industrial Average declined 2.92%, while the
Standard & Poor’s 500 slumped 2.91%. The Nasdaq Composite index fell 2.69%. The
MSCI EAFE index, which tracks developed overseas stock markets, lost 1.94%.
A Tumultuous Week
U.S. stocks were under pressure all week due to recession concerns and unsettled trading
in the bond and currency markets. This stress followed economic steps out of the U.K.
During the previous week, the Bank of England (BOE) raised interest rates, and its prime
minister announced unfunded tax cuts that the markets interpreted as inflationary. U.S.
bond yields rose early last week, sending stocks lower until Wednesday’s rally following
news that the BOE would buy U.K. government bonds. U.S. stocks resumed their descent
the following two days to close out a disappointing week, month, and third quarter.
The Bank of England Acts
Global bond and currency markets have been volatile recently due to global central bankers
raising interest rates to combat inflation. Developments in the U.K. took center stage last
week when the BOE announced it would be buying long-dated U.K. government bonds.
Upending the financial markets was the previous week’s announcement of tax cuts by the
country’s new prime minister, a step many investors viewed as counterproductive to the
BOE’s inflation-fighting efforts. The BOE’s decision to begin temporary purchases of
government bonds was well-received by capital markets, sending U.K. bond yields lower
and boosting U.K. stock prices in the immediate aftermath.
This Week: Key Economic Data
Monday: Institute for Supply Management (ISM) Manufacturing Index.
Tuesday: Factory Orders. Job Openings and Labor Turnover Survey (JOLTS).
Wednesday: Automated Data Processing (ADP) Employment Report. Institute for Supply
Management (ISM) Services Index.
Thursday: Jobless Claims.
Friday: Employment Situation.
This Week: Notable Companies Reporting Earnings
Wednesday: Lamb Weston (LW).
Thursday: Constellation Brands, Inc. (STZ), McCormick & Company, Inc. (MKC),
Conagra Brands (CAG).
There are many things I'd like to cover here, but don't have the time today to cram it all in.
Plus you don't want to have to read pages and pages. I'll let a few charts and graphs I came
across over the weekend summarize for me some. The rest we'll save for our 4th quarter
broad update. I keep saying it, but sentiment is about as bad as I've seen it besides maybe
just a few days in October of 2008. Sentiment is usually a fairly good contrarian indicator
when you look out a year or so. Just file that in the archives and we'll come back to it in 2023.
Our current turbulent stock market is directly correlated to inflation and interest rates, both of
which the Federal Reserve is responsible for. Inflation can be insidious and they have to get
ahead of it. However, the data they look at it somewhat lagging and they tend to go to far and
then have to pivot. Everyone says there will be no pivot soon and there may not be, but they
are going to have to become more data dependent rather than just keep pushing rates up in a
vacuum. The Fed experts indicate the Fed Funds rate, which now stands at 3.25%, will peak
out somewhere around 4.5%. That would make us 2-3 hikes away from their terminal rate.
Conceivably we could be there by year end. I've mentioned before that the market is looking
for visibility as to how high interest rates must go. We are getting some of that visibility.
Unfortunately, the Fed doesn't have the greatest track record, so even if inflation starts to cool
more they could go too far. They'd rather go too far than not enough is the impression they give.
As you can see below, they haven't been very good this cycle with their inflation forecasts.
doesn't hang out at the peaks for very long. Conceivably, this is because they go too far and have to
regardless of what they say, they often have to do what the markets are telling them. Besides the
job market the economy is now noticeably slowing based on the data and inflation in turn is
responding. The Bank of England had to step in and provide liquidity to their fixed income markets
last week as mentioned above as quickly rising interest rates began causing a bit of a dislocation.
We will pay close attention to the inflation numbers and pass along anything that is relevant.
All in all we continue to own blue chip businesses that are the backbone of the American way of life.
They aren't going to evaporate because of changes in the business cycle. Good businesses tend to get
better over time and that is what we are counting on. Stock prices can be fickle in the short term, but
tend to track a company's progress over time.
downturn in stocks. While we've been through many of these cycles before they never really get any
easier to endure. At some point there will be a turn and you want to be there when the turn comes. As
shown below this is the 9th time since 1950 that the S&P 500 is down 25% or more. Keeping in mind
past performance is absolutely no guarantee of future results and that it could get worse before it gets
better. History shows forward returns from down 25% are pretty good 1, 3, 5 and 10 years out.
seems to have peaked, but as mentioned before there are still some sticky areas. Corporate earnings
will also play a role. We should get some insight there as we will kick of earnings season in the next
few weeks. I don't know exactly where the trough for the current decline will be, but based one the
chart above the odds of doing well over time are still in your favor.
THIS WEEK'S UPDATE
October 03, 2022|