Market Update: September 23, 2022

Volatility continues to grip the market this week. The market fell through the higher-low support area late last week. And declines continue today September, 23rd indicating that we may test those -23% lows established back in June.

The big news item of the week came from the Federal Reserve who elected to increase interest rates by another 75 basis points. Forward expectations on short term rates were also reset higher and for longer through the end of 2023. Following the meeting, a plethora of “bad news” headlines hit the news stands and panic continues to rise.

The collective panic combined with a Fed continuing to be restrictive on monetary policy means that it’s about time for the next step in the cycle. As covered last week, inflation unexpectedly increased month-over-month in August.

But don’t kid yourself, inflation is falling and prices with it. Crude oil is down nearly $40 a barrel from the June highs. Gasoline futures prices are nearly cut in half. And Producer prices have been steadily falling after peaking in June.

Which means we’re no longer talking about rising prices, but falling prices. Ultimately, falling prices translate into lower margins, lower earnings, and volatile stock prices for publicly traded companies. After recessions start, and panic starts to set in, forward earnings expectations shown in purple start to fall as we’ve seen in the Dotcom, Global Financial Crisis, and the Covid Pandemic. So far this year, earnings expectations have barely budged indicating that reality hasn’t yet set in that falling prices mean falling earnings and we’re just at the beginning stages of the next leg of the business cycle. It needs to be pointed out, however, that stock prices almost always start to rise before earnings start to recover. This means, earnings expectations are a notoriously lagging variable.

With that in mind, some important areas to watch are the June lows and the pre-pandemic highs. The pre-pandemic highs would correspond closely to the average bear market decline. Should we enter into a recession, that would be a key area to watch.

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Sources: 

1.FactSet Research Systems. (n.d.). S&P 500 (Interactive Charts). Retrieved September 23, 2022, from FactSet Database.

2.Bureau of Labor Statistics. US Department of Labor. News Release September 13, 2022 “Consumer Price Index – August 2022”. Retrieved from www.bls.gov/cpi

3.FactSet Research Systems. (n.d.). WTI spot prices (Interactive Charts). Retrieved September 23, 2022, from FactSet Database.

4.FactSet Research Systems. (n.d.). Gasoline RBOB futures (Interactive Charts). Retrieved September 23, 2022, from FactSet Database.

5.FactSet Research Systems. (n.d.). Producer price index Y/Y% (Interactive Charts). Retrieved September 23, 2022, from FactSet Database.

6.FactSet Research Systems. (n.d.). S&P 500 prices and NTM EPS (Interactive Charts). Retrieved September 23, 2022, from FactSet Database.

7.FactSet Research Systems. (n.d.). S&P 500 (Interactive Charts). Retrieved September 23, 2022, from FactSet Database.

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The Consumer Price Index (CPI) is a measure that examines the weighted average of prices of a basket of consumer goods and services, such as transportation, food, and medical care. It is calculated by taking price changes for each item in the predetermined basket of goods and averaging them. Changes in the CPI are used to assess price changes associated with the cost of living.

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