Strategy and Positioning written by Steve Orr, Chief Investment Officer; and Essential Economics written by Mark Frears, Investment Advisor

As of market close September 9, 2022. Returns in percent.

 Strategy & Positioning 

 — Steve Orr 

Head fake?

Stocks up, bonds down. Last week was a nice break after three weeks and drops of 8% to 10% in major markets. We are slightly encouraged by the recent higher lows put in by most stock indices. Stepping back markets have worked into trading ranges. “Mucking around” without trend. 

The S&P 500’s recent range from 3,750 to 4,350 adds to the sideways action that started in late July. The big index is down just 1.6% from July 28 through last Friday’s close. Not much to worry about…until you remember that during that span the index traversed an 11% span. Along the way many of those moves were one day swings. 

Index daily moves have been something to behold this year. Last Friday marked the 42nd time this year that the S&P 500 has dropped 1% or more. According to Bespoke Research, there have only been four other years that experienced this many or more big moves. So, if you are feeling a little off kilter by the constant moves back and forth, just know that markets are in rare territory for volatility. 

Last week’s rally should not fuel thoughts of a rally revival. Yes, there were some significant moves last week and breadth improvements. One week does not a trend change make and there is a lot of ground to plow. We are a good 5% below the S&P 500’s 200-day moving average. The wall of worry to scale that 5% seems to grow daily. Last week could be a head fake for short-term traders. 

Down is down

Usually volatility means either bad news, uncertainty or both. We would put the passing of Queen Elizabeth II on the bad news list. She was a global treasure. Uncertainty does reign across most markets, both stock and bonds. 

What about commodities? As slowdowns take hold around the globe, demand for raw materials, transportation and finished goods continues to ebb. Copper, lumber, wheat, corn and crude oil remain well below recent highs. Some of the grain complex, notably corn futures, have risen the last five weeks. That is more speculators positioning ahead of today’s USDA corn crop estimate than a change in long- term trend. The Dow Transports index remains in a downtrend since its high last November. FedEx has led the group lower, falling -12%, followed by Alaska Air at -11.7% over that period. Raw materials and transportation stocks are a bellwether for corporate activity. Lower prices for both suggest recent GDP estimates of 2% for the U.S. third quarter may be too high. 

Less up 

One market that is trending higher is long-term interest rates. Treasury interest rates from 10 years through 30 years are near or above pre-shutdown levels. Traders are taking Fed speakers seriously after a number of speeches last week. Fed Governor Waller and St. Louis Fed President Bullard both favored a three-quarters of a point increase at the September 21 meeting. Chairman Powell stuck to the “data dependent” line, saying he could go either a half or three-quarters of a point. 

One of the key data points is tomorrow’s consumer price index reading for August. Its year-over-year change peaked at 9.1% in June. July’s reading ticked down to 8.5% and economists estimate August is at 8%. These “headline” inflation numbers are dominated by gasoline prices. Key to remember is that even as the price of gas has fallen, volumes are also falling. People are not driving as much over the last three months in response to higher prices and cloudy economic outlook. 

Even if CPI inflation month-over-month turns to zero for September through December, year-over-year inflation will still average 6.5%. Hardly a “neutral” level when overnight rates could end the year at 4%. Remember, CPI and PPI measure the rate of change of prices. Just because the rate falls to zero or negative does not mean we will return to 2019 prices. After four decades of successively lower inflation, we are not fans of the current environment. 

We are grateful that we are not in Europe. Natural gas is three times higher than in March in the Netherlands. Germany’s producer price index hovers at 37% year-over-year. Their source of inflation is in part their reliance on natural gas from Russia. The Europeans have given the throttle of their economy to Putin — he can boost activity by allowing more gas to flow through Nord Stream 1 or cause plants to shut down as was the case last week.