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THIS WEEK'S UPDATE

| October 03, 2022
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Last Week On Wall Street


Rising recession fears and uncertainty in the bond and currency markets sent stocks to

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).

Final Thoughts

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.





You can also see in the chart below other than the mid to late 1990's the Fed Funds rate typically

doesn't hang out at the peaks for very long.  Conceivably, this is because they go too far and have to

pivot.



I am not here to beat up the Fed today.  I wouldn't want the job.  My goal is to illustrate that

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.



The market reflects the pessimistic sentiment of the day and as a result we are experiencing yet another

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.


So, it may get worse before it gets better.  Much will depend on interest rates and inflation.  Inflation

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.  


Have a great week!

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