Time to be Greedy?
By Crest Capital Advisors on September 30, 2022
Dow: (2.92%) to 28,725.51
S&P 500: (2.91%) to 3,585.62
Nasdaq: (2.69%) to 10,575.62
Russell 2000: (0.89%) to 1,664.72
10 Year Yield: 3.81%
Outperformers: Energy 1.83%
Underperformers: Utilities (8.81%), Technology (4.19%), Consumer Staples (3.96%)
US stocks were lower across the board this week, with the major averages now down six of the past seven weeks. The S&P 500 set fresh YTD intraday and closing lows on Friday, breaking below 3,600 and touching the lowest levels since November 2020.
The driver of asset prices this week was more or less the same as the weeks prior, the fear that an overly hawkish Fed may drive the economy into recession. A big barrage of Fed-speak this week largely reiterated the raise-and-hold/higher-for-longer mindset. There was also a fair bit of cautious corporate commentary ahead of the coming start to the Q3 earnings season, with some beginning to wonder what other shoes might drop. Surveys continue to show pessimistic sentiment, and oversold conditions did not generate much support for bounce attempts this week.
The state of the market mood is entirely negative today. This brings up a famous quote from an investing legend, Warren Buffett. “Be fearful when others are greedy, be greedy when others are fearful”. It may just be time to take his advice.
Next week has a busy economic calendar, with the big event the September nonfarm payrolls report on Friday. Consensus is currently looking for a monthly gain of 250K, in what would be a step down from August’s 315K pace. The market will also get a look at September ISM manufacturing (Monday), August job openings (Tuesday), and September ISM services (Wednesday).
Oversold, Overdone
With the close of trading on Friday, we also close the books on September month-end and it’s certainly been a September not to remember. The negative feedback loop that dominated trading this month was catalyzed in late August with Powell’s Jackson Hole Speech, and data point after data point between then and now has done nothing to shift the narrative. Instead, we find market sentiment falling off a cliff everywhere as conditions within the market structure are reflective of the worst of any historical bear market period of the past.
Yet, at some point within all the negativity, the excessive bearishness and positioning become a bullish indicator. When we run out of marginal sellers, the only thing left is for buyers to emerge. Excessive speculation on the downside often provides the fuel (Short-covering by definition requires bearish investors to buy back stock in order to close positions.) for the market to begin a sustained move to the upside.
Here’s another silver lining. We’ve already seen from the June lows how quickly a bullish reversal can occur. It wasn’t that long ago (maybe 6 weeks ago) that we were fielding calls asking about adding to market exposures in order to not miss out on an anticipated year-end rally. Now, 6 weeks removed, markets are re-testing the same lows we saw last June and the calls we receive today are universally asking “when is the market going to the bottom and should we be selling?”! You can see, fairly quickly, that as emotional human beings, the temptation is to give into the wrong emotions at the wrong time.
Now is the time we should be digging deeper to find resolve, perhaps even looking to take advantage of other’s emotional actions. (After all, it’s always the other guy that is emotional…not us ?). Still skeptical? Well, that would be natural. But take a look at the charts below to see just how extreme the conditions are today and take note that previous occasions where we reached these types of levels were all at or very, very near to the ultimate bottom.
First, we take a look at short positioning and note that institutional investors are as net short today as they were at the lows of 2008, 2011, 2015, and 2020. All prior occasions were great entry points.
Panicky traders are buying puts (bets on lower prices) at record levels. The Nasdaq put/call ratio 50-day moving average has just made a record high.
Here’s another look at the craziness input options, this time focused on the exploding volume of contracts traded on the broader S&P 500 index.
Bears outnumbered Bulls by 43% in last week’s AAII sentiment survey. With data going back to 1987, the only other times we’ve seen sentiment this bearish…1) October 1990 (-20% bear market that bottomed in October 1990 w/recession in 1990-1991) 2) March 2009 (week of the lows).
The Bar is Low
As we enter Q3 earnings season in a few weeks, we note that analysts made the largest cuts to Q3 earnings estimates for S&P 500 companies during the 3rd quarter in more than 2 years. We could be setting up for a ‘better than feared’ quarter…similar to what we got from Q2 results.
Yeah, But, ‘Shouldn’t We Sell to Avoid More Pain Anyway?’
Although it’s easier said than done, ignoring the day-to-day gyrations in the market and sensationalized headlines rationalizing the sell-offs is often the best strategy. We would all love to time the market, miss the worst days, and be fully invested only on the best days, but it is impossible. As the chart below shows, missing just the 5 best days over the last 25 years would result in annualized returns 1.8% less than being fully invested. Miss the 10 best days and your return is nearly halved. Missed the 30 best days you may as well not ever be invested at all!
Dubious Record(s)
Of the 187 quarters since 1976, there has never been a period that has seen negative quarterly returns for both stocks and bonds three quarters in a row. Should the S&P 500 close below 3,785 today, this will occur. Negative returns for both stocks and bonds are more often than not associated with recessions which is looking more and more likely these days.
During the first nine months of the year, 88% of trading days had an intraday range greater than 1%. This is the highest level since 2009 when 95% of the trading days saw ranges greater than 1%.
“Data Dependent”, But Which Data?
The Fed has been focused acutely on inflation reports (inherently backward-looking) as well as labor market conditions (also generally backward-looking) to inform its policy decisions. Investors and traders are focused on market data that has adjusted in real-time, or in many cases is forward-looking and anticipatory. Part of the problem we have today is these data sets are in conflict with one another.
How should investors react when important companies like Nike and Micron Technologies (Both reported earnings results and provided outlook this week) are saying they have excess inventory problems and are seeing waning demand in end markets? This is deflationary! Yet on the same market day, the Personal Consumption Expenditure (PCE) report for August is released and it comes in hotter than expected? That reinforces the high inflationary environment conclusion.
So here we have the clashing of two narratives. We either have high and rising inflation (can’t happen without robust demand) or we have an impending recession (marked by significantly falling demand). We really cannot have both?
The August Core Personal Consumption Expenditure data (Core-PCE) came in at +0.6% month-over-month vs 0.5% expected. The year-over-year rate actually increased from 4.7% last month, to 4.9% in August. This is not the data that we would expect given the real-time market data. Yet, we still argue inflation peaked many months ago (see the declining blue arrow below), even though this last month has hooked back up (red arrow).
But there is really no new information in this report. It covers the same period as the August CPI report released two weeks ago, and is based on the same underlying price surveys. Those surveys are then aggregated up into a weighted average using different techniques than CPI, which historically yields lower numbers (as this month does). So it’s no surprise to see this morning’s PCE having about the same dynamics as CPI did two weeks ago, basically, just offset lower.
Year-over-year retail inventory growth is now at unprecedented levels. This is not a signal of strong demand!
Easing bottlenecks? Try ‘collapsing’. The number of ships waiting to get into the Port of LA/Long Beach has declined to only 6! It had peaked at 106 ships in January (via JP Morgan). To go along with this, we’ve seen an unbelievable decline in shipping rates as the cost to send a 40-foot container from Shanghai to Los Angeles has fallen by 74% from its recent peak in late 2021.
And, a stunning drop in pending home sales (coming down from historically strong numbers in 2021) continues as we now have a -22.5% year-over-year drop, among the worst on record. The Fed has tightened rates to the extent that 30-year mortgages are now pushing towards 7%. Housing activity is plummeting as a result.
And pulling it all together, we note that market-based inflation expectations hit an 18-month low today at 2.19%, down from a peak of 3.02% in April. The global slowdown and tightening monetary policy in nearly every country around the world is breaking the back of inflation. Despite the lack of confirmation from the backward-looking data sets, the Fed should start to moderate its hawkish rhetoric soon.
Economic Funnies
Jerome Powell already ruined Christmas 2018, now he has his sights set on 2022.
Crazy Stat(s) of the Week
Here are this week’s crazy stat(s):
- We recently completed a streak of 42 days without a back-to-back daily consecutive decline in the 2-year Treasury yield! This marks the longest streak since 2-year notes were introduced. the last two streaks that topped 30 days (6/15/2007 and 10/23/2018) both occurred just before the peak of those respective tightening cycles.
- This week bore witness to a once in a lifetime move in long-dated UK Government bonds. With the Bank of England’s (BOE) pledge of unlimited purchases of long-dated bonds on Wednesday, the yield on 30-year Gilts (as they are called) plunged by over 100 basis points! Look at the chart below and the massive red line on the right for perspective.
- The S&P 500 Technology sector has now erased all gains since November 2020.
Quote of the Week
“If you’re a long-term investor, I’d buy now. I think it’s absolutely great long-term value.”
-Jeremy Siegel, September 30th, 2022 (In comments regarding the stock market)
Calendar of Events to Watch for the Week of October 3rd
We have one more relatively quiet week in the US earnings calendar before the banks kick off the Q3 earnings season on October 14th. On the US Economic Calendar, we get data readouts on ISM Manufacturing on Monday; JOLTS Job Openings on Tuesday; the ISM Non-Manufacturing Index on Wednesday; and then wrap the week with Nonfarm Payrolls and the Unemployment Rate on Friday. Along with incoming data on the economy, investors will continue to pay attention to geo-political events (Russia-Ukraine, OPEC+) as well as any hawkish rhetoric from various Fed Presidents as they do their usual rounds of speeches and presentations.
Monday 10/3– The September ISM Manufacturing Index is expected to come in roughly in line with the prior month at 52.3 v. 52.8 in August. We’ll also get data on September auto sales which will be watched for signs of a deteriorating consumer.
Tuesday 10/4 – The August JOLTS Job Openings report is expected to come in about a half percent lower than the prior month. Given Powell’s outsized scrutiny on the labor market, this report will bet outsized attention from traders. August Final Durable Goods data will also be released with economists predicting a -1.2% reading.
Wednesday 10/5 – The September ISM Services index is expected to come in at a fairly robust 56.0, down slightly from 56.9 last month.
Thursday 10/6 – Just the weekly Continuing Jobless Claims today.
Friday 10/7 – The September Nonfarm payrolls report is expected to post a monthly increase of 250k net new jobs and an unchanged unemployment rate at 3.7%.
Source: FactSet
