HWM Market Recap - October 2022
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So, how’s the market? Let’s just say I’ve seen better. In the USA, the organized stock market we know today has been around since the Buttonwood Agreement of 1792, and marketplaces date back as long as human beings have been trading. The one constant across time and markets has always been human emotion. Money is 80% emotion. The other 20% is dynamic, vast, and intricate and demands a lifetime of study and diligence. Nonetheless, human emotion is greatly more influential.
Investments exist to help us make our financial way, but nothing is automatic. Decisions must be made, and, by nature, our emotions will fundamentally assert themselves in our investment decision-making process.
Sir John Templeton, one of the most influential global investors of the twentieth century, described stock market cycles as:
Bull markets are born on pessimism, grow on skepticism, mature on optimism, and die on euphoria.
Notice there are no words in there that have anything to do with earnings or economic growth. Over long periods, business (microeconomic) fundamentals and economic (macroeconomic) fundamentals drive stock and bond prices. However, in short periods, human emotions cause volatility and extreme price fluctuations.
Market-savvy investors will say that bear markets typically end because investors are apathetic, not when everyone is pessimistic. In other words, bear market bottoms often form when most investors have stopped looking for them after unsuccessfully trying to pick them time and time again.
With emotion taking up 80% of the stock market, the other 20% starts with the prospects for a growing company and increasing earnings. Consider that when the economy is in a recession and earnings decline, that is consequently negative for stock prices. Conversely, a growing economy is positive for stock prices.
Another consideration is what investors are willing to pay for the growth and earnings of a company -- this is the price-to-earnings ratio (P/E). Since the beginning of this year, the average P/E ratio has fallen from 21x to 17x. In other words, investors, on average, are willing to pay less for every dollar of earnings now than when the year began. This is how stock prices can fall, or rise, even when earnings do not change. When rising or falling earnings combine with varying P/E ratios, the consequent price changes can be substantial. Currently, P/E ratios are falling; however, corporate earnings have remained constructive. If the economic environment weakens, we can expect earnings to decline.
As advisors, we are taught “not to fight the Fed.” While the Fed is not the only game in town, it is the most significant. Fundamentally, stocks rise and the economy expands when the Fed accommodates economic growth through steady and/or lowering interest rates. Conversely, stocks fall and the economy contracts when the Fed raises interest rates to slow the economy to curtail inflation. Currently, the economy and the Fed are working against us. Because of this, we remain cautious.
In the meantime, we adjust our portfolios to ensure we are comfortable with our investments while we allow the current environment to run its course. As Sir John Templeton said:
The four most expensive words in the English language are ‘This time, it’s different.’
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Monthly Changes in Major Indices
S&P 500: -9.90%
Dow Jones Industrial Average: -9.46%
Nasdaq Composite: -10.94%
Monthly Performance By Sector
Health Care (XLV) -3.16%
Financials (XLF) -8.36%
Consumer Staples (XLP) -8.70%
Consumer Discretionary (XLY) -9.11%
Energy (XLE) -10.38%
Materials (XLB) -10.43%
Industrials (XLI) -11.19%
Communication Services (XLC) -11.54%
Utilities (XLU) -11.87%
Technology (XLK) -12.83%
Real Estate (XLRE) -13.48%
Monthly Top 5 Performers
Health Care (XLV) -3.16%
Health Care jumped from the third-worst-performing sector in August to the best-performing in September. Leaders in the sector included: Regeneron Pharmaceuticals Inc (+17.08%), Bristol-Myers Squibb Co (+5.79%), Eli Lilly and Co (+5.31%), Johnson & Johnson (+0.57%), and Merck & Co Inc (-0.09%). Regeneron Pharmaceuticals Inc (REGN) stock skyrocketed in September after two trials of a dosage of a signature eye drug showed promising results in treating two types of eye diseases related to blood vessel issues caused by old age and/or diabetes.
Financials (XLF) -8.36%
Financials remained in the top five performing sectors month-over-month, moving from the third-best-performing sector to the second. Its leaders included: Charles Schwab Corp (-0.87%), Chubb Ltd (-3.86%), Aon PLC (-5.05%), The Travelers Companies Inc (-5.75%), and PNC Financial Services Group Inc (-6.20%).
Consumer Staples (XLP) -8.70%
Consumer Staples also jumped one spot month-over-month from the fourth-best-performing sector in August to the third in September. Its leaders included: General Mills Inc (-0.48%), Monster Beverage Corp (-1.77%), Walmart Inc (-2.10%), The Hershey Co (-2.54%), and Kellogg Co (-4.06%).
Consumer Discretionary (XLY) -9.11%
Leading the fourth-best-performing sector for September were Starbucks Corp (+1.02%), O’Reilly Automotive Inc (+0.73%), Dollar General Corp (+0.47%), AutoZone Inc (+0.23%), and TJX Companies Inc (-0.70%). Starbucks Corp (SBUX) saw gains in September after the company announced plans to invest roughly $450 million to upgrade its cafes with new equipment. The company also outlined plans to build about 2,000 new stores over the next three years.
Energy (XLE) -10.38%
Despite a difficult month for Energy, the sector finished in the top five for September. Leading the sector in September were: Marathon Petroleum Corp (-2.14%), ConocoPhillips (-6.13%), Schlumberger Ltd (-6.75%), EOG Resources Inc (-7.23%), and Exxon Mobil Corp (-9.34%).
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The Consumer Price Index (CPI) report showed that prices rose by 1% in August after being unchanged in July. The index was up 8.3% year-over-year, slowing from an annual rate of 8.5% in July. Surging food, shelter, and medical care costs all contributed -- food prices increased 11.4% from a year ago, marking the most significant 12-month increase since 1979. However, the report also demonstrated that prices were largely offset by a 10.6% reduction in gas prices. The core CPI, which excludes food and energy prices, rose 0.6% in August and was up 6.3% from a year ago, compared to 5.9% in July.
For the third consecutive time, the Federal Reserve raised interest rates by 0.75% (75 basis points). Interest rates now sit at their highest levels since 2008. Other central banks around the globe followed the Federal Reserve by increasing their interest rates, including the Bank of England, the Swiss National Bank, and the Indonesian central bank.
The U.S. Department of Commerce’s Bureau of Economic Analysis reported that real gross domestic product (GDP) decreased at an annual rate of 0.6% in the second quarter of 2022, after a 1.6% decrease in the first quarter. The smaller decrease in Q2 compared to Q1 reflected an increase in exports and consumer spending.
The University of Michigan’s Consumer Sentiment Index (MSCI) announced that consumer sentiment saw a month-over-month increase of 2.2%. Compared to one year ago, sentiment is still down 18.3%.
Hiring has remained strong, despite a cooling labor market. According to the Bureau of Labor Statistics (BLS), the U.S. added 528,000 jobs in July, while the unemployment rate fell to 3.5%, matching its pre-pandemic low. According to the Bureau of Labor Statistics (BLS), there were two job openings for every individual seeking a job last month.
Freddie Mac reported as of September 29th that mortgage rates had risen for the sixth consecutive week. Their survey indicated “that the range of weekly rate quotes for a 30-year fixed-rate mortgage has more than doubled over the last year.” As of September 29th, the weekly average for a 30-year fixed sits at 6.7%, which is up by 3.69% from last year. The previous time rates were close to this high was in August 2008, when they reached 6.57%.
Additionally, mortgage application volume dropped by 3.7%, home purchase applications fell by 0.4%, and refinancing applications sank by 11%. Not to mention, home purchase cancellations were above 15% for the second straight month. About 64,000 agreements, or 15.2%, were canceled in August, up 12.1% from a year earlier. “Pandemic boomtowns” located in the Sun Belt states saw the highest cancellation rates -- all ten cities with cancellation rates of 20% or higher were located in the Sun Belt.
The Department of Education is set to release the application for the White House’s student loan forgiveness plan in October. Under President Biden’s plan, individuals with federal student loans who in 2020 or 2021 earned less than $125,000, or married couples or heads of households who made less than $250,000, could see up to $10,000 of their loans forgiven. Furthermore, an additional $10,000 of relief will be available for recipients of Pell Grants. Borrowers can sign up on the Department of Education’s website for updates on the form’s status. Click on “NEW!! Federal Student loan Borrower Updates.” To find out more and to see if you qualify, reach out to us! Or check out this helpful article on studentaid.gov.
The Bank of England (BoE) said it is “monitoring developments in the financial market very closely” and “will not hesitate” to raise interest rates to curb inflation. These comments come after many call for the bank to address the impact of massive tax cuts and other fiscal measures announced by Chancellor of the Exchequer Kwasi Kwarteng. In reacting to the stimulus plan, the British pound slumped to a record low compared to the U.S. dollar and drove up U.K. government bond rates to their highest level since the 2007-2008 financial crisis.
The International Energy Agency (IEA) released its annual Tracking Clean Energy Progress report, showing that 2022 could be a record year around the globe for electric vehicle sales. The IEA says EVs could equate to 13% of all light vehicle sales in 2022, up from about 9% last year. Despite the positive overall outlook for the EV market, the IEA says they are “not yet a global phenomenon. Sales in developing and emerging countries have been slow due to higher purchase costs and a lack of charging infrastructure availability.”
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About the Author
Holzberg Wealth Management is a family-owned and operated financial planning and investment management firm based in Marin County, CA. As your financial advisors, we serve you as a fiduciary and are fee-only, so we never receive commissions of any kind. We help individuals and families like you in the greater San Francisco Bay Area and virtually nationwide with the financial decision-making process to organize, grow, and protect your assets.
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