June 24, 2022

Market Update: June 24, 2022

Welcome to the weekly market update from Signature Wealth Management. I’m Brian Ransom, Research Director from Signature Wealth and here’s what happened in the market this week.

 

Following last weeks dreadful returns, the market actually responded positively this week and is up 3.3% from the bottom. The S&P remains well above the Pre-pandemic highs set in early 2020 for the time being.

In the news this week, Federal Reserve chairman Jerome Powell testified before Congress. The US and Europe show signs of slowing economic growth as recession fears increase. And stock futures actually rise because this news. This may sound counter intuitive at first. But for the last 6 months, the market has pulled back because of hot inflation and rising interest rates. A recession would mean cooling inflation and falling interest rates. Thus, the positive move higher.

On that note, the last 6 months have been driven by that theme of rising interest rates and price-to-earnings compression or PE compression. While prices in the stock market have fallen over 20%, shown in blue, the valuation of the stock market or PE shown in purple have been declining for well over a year now. That’s primarily because of rising interest rates. Basically, as interest rates rise, future cash flows must be discounted at a higher rate and the value of an asset falls because of it.

The question remains, how much further can PE’s compress? Well, we can use the 1994 bond crash as a comparison. In 1994, the Federal Reserve gave a surprise interest rate increase that caused the bond market to sell off, increasing interest rates, and causing PE compression throughout the stock market. The 2-year yield began a rapid ascent and PE ratios followed. It wasn’t until the Federal Reserve capitulated to a slowing economy and began cutting interest rates that the stock market valuations began to recover. This happened to coincide with a near inversion of the 10-2 yield curve.

Compare that to today, the 2-year yield is once again rapidly rising in response to the Federal Reserve and PE’s are compressing in conjunction. Likewise, we are currently very close to another 10-2 yield curve inversion as we speak. However, we do not yet know exactly how high the Fed intends to raise interest rates nor do we know exactly how high the 2-year yield will reach.

For more information on this topic or a variety of other topics including market updates, financial planning, and wealth management please like, subscribe, and follow. Don’t forget to check out our new podcast Up and to the Right! New episodes for Up and to the Right drop on a bi-weekly basis on all your favorite podcasting apps.

Sources:

1.FactSet Research Systems. (n.d.). S&P 500 (Interactive Charts). Retrieved June 24, 2022, from FactSet Database.

2.FactSet Research Systems. (n.d.). S&P 500 (Interactive Charts). Retrieved June 24, 2022, from FactSet Database.

3.FactSet Research Systems. (n.d.). S&P 500 PE & 2 Year Yield (1994, Interactive Charts). Retrieved June 24, 2022, from FactSet Database.

4.FactSet Research Systems. (n.d.). S&P 500 PE & 2 Year Yield (present day, Interactive Charts). Retrieved June 24, 2022, from FactSet Database

Signature Wealth Management Group is registered as an investment adviser with the SEC. Signature Wealth only transacts business in states where it is properly registered, or is excluded or exempted from registration requirements.

 

Information presented is believed to be factual and up-to-date, but we do not guarantee its accuracy and it should not be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect the judgment of the author as of the date of publication and are subject to change.

 

Information contained herein does not involve the rendering of personalized investment advice, but is limited to the dissemination of general information.

The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general.

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.

Past performance does not guarantee future results. Consult your financial professional before making any investment decision.

Forward-looking statements are not guarantees, and they involve risks, uncertainties and assumptions. The use of words such as “will”, “may”, “could”, “should”, and “would”, as well as any other statement that necessarily depends on future events, are intended to identify forward-looking statements.

 

Information is not an offer to buy or sell, or a solicitation of any offer to buy or sell the securities mentioned herein.

The S&P U.S. Style Indices measure the performance of U.S. equities fully or partially categorized as either growth or value stocks, as determined by Style Scores for each security. The Style series is weighted by float-adjusted market capitalization (FMC), and the Pure Style index series is weighted by Style Score subject to the rules described in Index Construction.

All information presented prior to an index’s Launch Date is hypothetical (back-tested), not actual performance. The Index returns shown do not represent the results of actual trading of investable assets/securities. S&P Dow Jones Indices LLC maintains the Index and calculates the Index levels and performance shown or discussed, but does not manage actual assets. Please refer to the methodology paper for the Index, available at www.spdji.com for more details about the index, including the manner in which it is rebalanced, the timing of such rebalancing, criteria for additions and deletions, as well as all index calculations.

Share

Recent Articles

Categories

Go to Top