When the stock market closed for trading on August 31, 2022, the S&P 500 finished down 3.97% for the month and 17.02% year-to-date. August probably felt like a slap in the face after getting some reprieve with July’s rally during a horrible year to anyone invested in this market.
Last month, we suggested that July’s rally might not be just another Bull Market rally, and the jury is still out as the market began to recover quite strongly last week from the August lows. This week will provide more data on how strong inflation continues to be – or not to be; that is the question.
While the destination for where the Federal Reserve will stop raising rates isn’t likely to change, either way, the Consumer Price Index report due to be released today will offer direction to the Federal Reserve and its approach to raising rates. The thinking is the Fed will raise rates by 50bps or 75bps during their next FOMC meeting on September 20. The prevailing view is that if the number comes in softer than expected, this may provide cover for the Fed to pursue 50bps and likely goose the market higher.
Nonfarm payrolls rose by 315,000 jobs in August, just below the Dow Jones estimate of 318,000. The unemployment rate climbed to 3.7%, two-tenths of a percentage point higher than expectations. Wages also rose, with average hourly earnings up 5.2% from a year ago, slightly lower than the estimate. While the combined picture paints an economy weaker than expected, many suggest that the weaker numbers are better for the market as it also might point the Fed toward tightening less quickly.
Inflation Update
Oil prices have continued their decline and remain lower by more than 20% than the highs reached this summer. Oil is now back to the prices we saw in late January. Meanwhile, wheat prices rose by 1% in August but remain 36% lower than their May 2022 high. Natural gas proves to be the problem child regarding inflation relief, with prices climbing almost 11%, just 5.71% off its high set earlier in August.
The prices of these three commodities are the main drivers of where inflation goes from here. And the reality is natural gas will likely stay elevated as Russia weaponizes its Nord Stream gas pipeline to Europe unless Mother Nature offers some relief this winter. Europe’s solution to this seemingly inevitable problem will also color the market’s response.
The State of the Market
As volatile as the second half of August was, on a technical level, the broad US market needs to rally just another 3.60% to be above the 200-day moving average, which is roughly the same as it was when we began the month of August. Viewed from a shorter vantage point, most of the market is now above its 50-day moving average, which we’ve not seen since July. Furthermore, on a positive note, the S&P maintained and bounced off of 3900 on the S&P 500, a level many consider to be a significant support level. The S&P 500 is now trading at 4110 at the time of this writing.
Some thoughts about sentiment from Bespoke Research:
“In the latest update, only 18.1% of responses to the weekly AAII sentiment survey were reported as bullish. This is the lowest level we’ve seen for the year since April. Bearish sentiment was back to 53.3% this week. That is the highest level of bearish sentiment since the week of June 23rd and ranks in the top 2.5% of all weeks on record. Investors appear to be increasingly polarized between bullish and bearish sentiment as well. As optimism and pessimism have experienced wild swings, neutral sentiment has been relatively stable. Neutral sentiment only rose one percentage point this week, rising to 28.7%. That is right in the middle of its recent range. Given the large inverse moves in bulls and bears, the spread of the two has fallen deeper into negative territory after almost turning positive only a few weeks prior. We would also note that the over 30-point drop in the past month is the largest since a 47.4-point decline at the end of April and ranks as the 29th largest decline in a four-week span on record. With 23 weeks of negative readings in a row, the current stretch is now the second-longest streak of negative readings in the bull-bear spread on record.”
We think that with this much pessimism in the market, the table is set for solid market rallies from here on ANY good news, or less bad news, that is not currently priced into the market.
Seasonally speaking, we traditionally see companies who want to guide earnings lower usually do so after Labor Day weekend. That has not happened this year, of course; many guided lower during the summer. While the second half of September is historically the weakest of the year, all eyes will be on the Federal Reserve later this month. We believe that maintaining a neutral to defensive position remains warranted.
That said, we are monitoring the markets and portfolios, and we continue to be ready to make changes as necessary. As always, if you have any questions about your portfolio, feel free to contact us anytime. We’re here for you.