How Low Do We Go - Your Money September 23rd 2022
Posted by Steve Bokor
Wall Street drops yet again so “How Low Do We Go” as the S&P500 gets precariously close to the June lows. That mark today was touched in the intraday trade but closed above at the end of the day. it’s been a risk off week for virtually all asset classes except the US Dollar. The selloff is directly attributed to the ¾ point US rate hike on Wednesday with the promise of more, until inflation gets back down to the Feds 2% target. For the week Wall Street was considerably lower, mirroring global equities, as worries around further interest rate hikes by the major central banks weighed on sentiment. The NASDAQ reflects this with a 4.6% drop to 10,867. The Dow was no better off with a 4% decline to 29,590 that’s 20% from its Jan 4th record closing high, putting it into clear bear market territory bear at the close. The S&P500 was also dragged down 4.6% to 3693. Meanwhile Two-year US bond yields have risen from 0.2% one year ago to 4.20% today. Investors see this as too draconian and think it could cause a global recession.
Markets are also pricing in weakness in U.S. business activity that contracted for a third straight month in September, though the pace of decline slowed while improving global supply chains eased inflation pressures for companies. Confirming what we all suspect that a recession seems to be imminent alongside a bear market that is confirming we are in one.
Canada's main stock index Friday opened lower as oil prices fell over 6% That in turn caused a selloff in key Canadian commodities like oil and lumber stocks. Suncor and Interfor plunged 10% this week. Throw in Canadian retail sales data for July on the economic calendar and the TSX for the week slides 4.6% lower to 18,480
The following chart shows us how many stocks in the S&P 1500 have made new relative lows against their benchmark across multiple time frames in the trailing five days.The first thing that stands out is the continued short-term relative weakness across all sectors and time frames. Materials, Industrials, Technology, and Real Estate have clearly made their mark as the weakening headliners. Meanwhile, we have for most of the year seen a lack of relative weakness from energy and utilities. And that hasn't changed until this week where energy took a big move lower, finally that last shoe to drop.
If you expect to see a recovery in stocks and crypto anytime soon you are going need a weaker US Dollar. It's not a wish. It's necessary. There’s only one real safe haven and it isn’t T-Bills or the Euro, that’s a ---- show. Gold, really? It's been the Dixie, DXY the Greenback yes, the US Dollar. The devil you know vs the devil you don’t. The Dollar is the safest bet, and money has been rapidly moving in this direction against other currencies since May of 2021 even the Loonie has weakened recently. So, until you start to see some Dollar weakness, we wouldn't expect stocks, crypto and other risk assets to do well. And for good measure lets include gold in the slide as the Dollar remains ultimate slayer of markets. This chart really outlines this. When the dollar declines, stocks rise and when the greenback strengthens stocks weaken.
From a Macro view The Fed isn’t retreating from its stance on higher rates and tighter monetary policy. This is invading central banks around the world this year. In fact, the Federal Reserve is one of a many central banks meeting this week, and most will be expected to raise rates, again. Sweden the UK and Japan all stepped in. Both the level and ferocity of rate hikes is unparalleled. And that doesn’t even get into quantitative tightening in the US. The Fed’s balance sheet is ten times as large as it was two decades ago now standing at 8.82 trillion dollars and it's only begun to shrink, the 6-month weekly change just turned negative last month. (Source: Statista), Futures have now priced in 100 more basis points of tightening for the end of year.
Wednesday’s updated economic projections and expected path of rates garnered at least as much concern as the rate hike announcement itself. Stocks are struggling for traction, which is what typically happens when the Fed is aggressive, the housing market is already experiencing a hard landing and the remainder of the economy is likely not far behind. We wish we had some better news.
Happy Trading and Stay Safe.
Ian David Clark, CIM, alongside Steve Bokor, CFA
Portfolio Managers at Ocean Wealth
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