MARKET UPDATE OCTOBER 12, 2022

SUMMARY

Last week was a wild ride in the markets, with the S&P 500 increasing by about 5.8% between Monday and Tuesday. It then decreased by about -4% over the remainder of the week. Although it may not feel like it, the S&P 500 finished the week positive. It has been a unique year for the markets, as stocks and bonds both have been under significant pressure. The S&P 500 has now posted negative weekly returns 63% of the time this year, which is the second-worst year in history (1931 being the worst). Longer maturity Treasuries have also had negative weekly returns 70% of this year, the worst since 1961.

BROAD MARKET PERFORMANCE (AS OF 10/11/2022)

	YTD Performance	Trailing 1 Year Performance
SPY (SPDR S&P 500 ETF)	-23.81%	-16.46%
DIA (SPDR DJIA ETF)	-18.37%	-13.68%
QQQ (Nasdaq 100 ETF)	-33.63	-26.23%
TLT (20+ Year US Treasury ETF)	-31.53%	-28.04%
AGG (US Agg Bond ETF)	-15.03%	-14.59%
Table 1: Source: ETFdb.com.

MACROECONOMIC VIEW

The global and U.S. economies continue to weaken as price pressures, supply chain problems, and inventory problems persist. The OECD U.S. Composite Leading Indicator (CLI) fell again in September. This marks the sixth consecutive monthly decline. It is now at its lowest level since August 2020 and, excluding the government-induced economic shutdown during the pandemic, the lowest reading since November 2009. The leading factors contributing to the CLI’s decline were increasing interest rates, falling stock prices, and with housing and manufacturing weakness.

Figure 1: OECD U.S. Composite leading Indicator

VALUATIONS

As we have been writing about the last few weeks, valuations multiples have declined. For example, the S&P 500’s Forward Price/Earnings multiple has dropped from an over-valued level of 20x to a less expensive level of 15.4x. However, Price/Earnings multiples are dependent on two variables, price, and earnings. At this point, we are somewhat concerned about analysts’ earnings expectations over the next year. Our view is that there is risk that earnings estimates will be reduced over the coming weeks.

The third quarter earnings season is set to begin this week and the focus is on management’s guidance moving forward. NDR noted that “the upcoming period could be even tougher than normal given high inventories, rising wages, the strong dollar, and the weakening economy.” They also noted that they see a risk of recession in the next 12 months, a common prediction. During recessions (1948-present), the S&P 500 earnings have historically fallen -25.3% peak to trough on average. Current analysts’ estimates are expecting -5.52% year-over-year earnings growth for 2022 but are still pricing in +11.95% earnings growth for 2023. We view the potential decrease in 2023 earnings estimates as a headwind, and consequently we remain cautious.

Figure 2: Consensus Estimates Year over Year Growth for S&P 500

TECHNICALS/SENTIMENT

As you would expect, there were large amounts of buying early last week, before the markets “gave it back.” The number of shares advancing versus declining increased quite dramatically as the market spiked almost +6% in two days. NDR’s Chief U.S. Strategist Ed Clissold, CFA, pointed out that he sees signs of a successful retest of the June lows needing to be confirmed by the breadth of selling being less extreme than what we saw in the first half of the year (a divergence) and sentiment reversing from excessive pessimism.

While there were positive signs that the recent decline was just a retest, he also mentions that “Sector breadth and persistent selling pressure do not support the successful retest case.” In other words, there have not been discernable positive divergences at this point. While the extreme pessimism sentiment and other technical improvements are positive signs, intermediate-term breadth needs to improve to confirm any sort of sustainable year-end rally.

Figure 3: NDR Big Mo Tape Composite

Overall, we continue to follow NDR’s first rule of research: “Don’t fight the Fed.” Macro headwinds remain in force, and valuations, while slightly expensive at the moment, could come under pressure should analysts begin revising down their 2023 expectations. With that being said, investors are currently already extremely pessimistic and there is a lot of cash on the sidelines that could be used as a catalyst for a year-end rally. As always, we are watching the indicators and will allocate capital according to the message of the models.

Have a great week,

Regan Teague, CFA®, CFP®
Senior Investment Officer & Financial Advisor
Day Hagan Private Wealth

—Written 10.12.2022.

Don Hagan, CFA®, Partner
Art Day, Partner
Natalie Brown, CFP®

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