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Market Strategy 9/26/2022

  • John Stoltzfus
  • September 26, 2022

Been Down So Long Looks Like Up to Me

The S&P 500’s decline since mid-August has erased the summer rally begun on June 16

Key Takeaways

  • A second week of major drama within the stateside equity markets continues to remind investors that increased volatility is not uncommon in the early stages of a Federal Reserve hike cycle.
  • The storm of negative projection has hit not only stocks but bonds, gold, oil, and a wide range of currencies (with the exception of the US dollar) over the course of the past five weeks or so.
  • In our view, markets are likely to remain challenged by uncertainty until the arrival of Q3 earnings season (October 14), which will provide greater detail on the health of corporate revenues and profits.
  • Last week’s housing starts data were stronger than expected but other housing market indicators were weaker, suggesting that the Fed’s rate hikes are already being felt. 
abstract financials diagram

The big “claw back” since mid-August has set bearish prognosticators on a binge of negative projection that leads us to recall volatile periods in 2009, 2019 and 2020. It also reminds us that often negative projections aren’t realized in the end. And when and if they are realized usually the challenges presented bring not just risk but opportunities in the form of solutions to challenges even once seen as insurmountable.

In our view the problem with economies and markets in recovery periods like the aforementioned and the period we are in now is that they are fraught with uncertainty and provide “feeding frenzies” of negative projections that challenge the recovery under way, rattle investor sentiment, and overshadow positives emerging from the process of recovery.

Last Friday saw the Dow and the S&P 500 during intra-day trading move below the lows markets had closed at on June 16th―though they managed to close a few hairs above that June 16 closing low at last week’s end. This week we’d expect that those mid-summer lows recorded earlier this year could be “taken out” or surpassed to the downside before stocks can reach the end of the bear gauntlet they’re currently running.

Quotation from Aenean Pretium

With the forward valuation of the S&P 500 back down to 15.5x it would be normal for a shift in sentiment to emerge that could free up prospects for a rally.

The current storm of negative projection has hit not only stocks but bonds, gold, oil (yes oil!) and a wide range of currencies (with the exception of the US dollar) over the course of the past five weeks or so. At one point last Friday we couldn’t help but comment in our conversations with investment professionals we were in touch with, “and now it looks like they’re selling everything.”

The Fed Gives ‘em What They Wanted

Ironically, the Federal Reserve after having been for some time “behind the curve” in dealing with inflation is in the process of doing what many investors had wanted. Now as an end to “free money” gets underway and unabashedly shameful levels of leverage are forcefully taken off the economic landscape (as the Fed and other central banks around the world address untoward levels of inflation) their detractors bemoan that “aggressive “ tightening will end badly with a hard landing for the economy and stocks.

The effect of all this is to remind us of other Federal Funds rate hike cycles with the usual “gnashing of teeth,” bear claw backs and hyper volatility all with the effect of scaring inexperienced investors and rattling the convictions of even the seasoned pros who may have forgotten that it takes time to allow the efforts of the Fed to do what they are intended to do—to put inflation in check.

The scale of the rescue methodologies used by free spending politicians in Washington this round is likely to make the Fed’s efforts to curb inflation harder to put forward this cycle and subsequently is feeding some bearish market participants with the idea that the Fed might be bullied into a pivot (a pause or a cut in rates). Times like these are prone to humble prognosticators and tea leaf readers alike. The pendulum has swung both ways as both bulls and bears this year have weathered periods that have “baked to burnt” their best ponderings, tactical positioning and rebalancing efforts.

We also recall that the bear interludes this year have delivered their hardest punches during periods between earnings seasons, which when in progress have successfully challenged negative sentiment and projection with better than expected results (this was the case in aggregate for both Q1 and Q2 this year). Third-quarter earnings season could provide positive surprises to handily offset negative results. Time will tell.

From here to October 14 (when Q3 earnings season for the S&P 500 gets underway) might seem like “from here to eternity” for some investors. Meanwhile, markets and their participants will play their hands dependent on economic data, political, geopolitical, and corporate current events until then.

With the forward valuation of the S&P 500 back down to 15.7x it would be normal for a shift in sentiment to emerge that could free up prospects for a rally. While that might occur the current levels of uncertainty on the political front (i.e. spending and midterm elections stateside) and geopolitical issues (the war in Ukraine, Europe’s energy crisis) could preclude a rally in the near term.

For now we suggest investors consider meeting the current challenges to the markets by:

  • Staying the course that favors “growthier” value and “GARPier” growth stocks of companies with proven managements, great products, cash flow and profitability and ideally with a history of growing dividends;
  • Building shopping lists and keeping an eye out for “babies that get thrown out with the bath water” on down days in the market;
  • Consider opportunities for dollar cost averaging;
  • Remain prudently diversified;
  • Consider tax loss harvesting as an opportunity to optimize portfolio repositioning.
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John Stoltzfus


Chief Investment Strategist, Oppenheimer Asset Management Inc.

John is one of the most popular faces around Oppenheimer: our clients have come to rely on his market recaps for timely analysis and a confident viewpoint on the road forward. He frequently lends his expertise to CNBC, Bloomberg, Fox Business, and other notable networks.

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