Long Term – September 2022

Once a month, on the fourth Wednesday of the month, I will put up a long term view of the market.  This is provided for investors who don’t want to trade secondary swings in the market, but would like to exit the stock market relatively soon after a bear market begins, or enter the market after a new bull market begins (change in the primary trend).  In the blog, they will always have a title called “Long Term (month) (year)”, so you can use your browser “Find” function and easily find them.

Economics:

GDP – The second estimate of 2022 Q2 GDP released in late August was -0.6%.  Two consecutive quarters of negative GDP is a common definition of a recession, so here we are in a recession.  There are more complicated definitions of what a recession is, buy I don’t think my readers are interested in an academic discussion, so we’ll stick with the common definition. 

I looked up the Atlanta Fed GDPNow forecast, which gets close to the real number late in the quarter, and their forecast for Q3 GDP is +.3%.  There is a good chance the real number will be plus or minus 1%, so from -.7% to +1.3%.  That is from mild contraction to tepid growth range.

This is bearish for the stock market.

YearQuarterGDP %
2022Q2-0.6%
2022Q1-1.6%
   
2021Q46.9%
2021Q32.0%
2021Q26.7%
2021Q16.4%
   
2020Year0.1
2019Year2.3
2018Year2.9
2017Year2.6
2016Year2.0

Fed interest rates – The Fed raised the Fed Funds rate by .75% in late Sept., as expected.  That brought the Fed Funds rate to 3.25%, up from zero in February.  The Fed indicated that 2.5% is presumed to be the “neutral rate” for the economy, which is neither accommodative nor restrictive.  Unfortunately with inflation running at 8% on the CPI, we need a restrictive rate to slow the economy in order to bring down inflation, so now the Fed says the rate is restrictive.

The impact on mortgage rates has been more dramatic taking the rate on a 30 year fixed mortgage from 3% to 6%, and housing is seeing a slowdown.  That will dampen inflation going forward. 

The other thing the Fed is doing is Quantitative Tightening (QT), which means they are not buying bonds to replace those that they hold when they mature, and outright selling bonds into the secondary market.  This will force private companies and individuals to buy the bonds, and then those dollars are not available to buy TV’s, boats, or other big ticket items.  Private investors may demand a higher interest rate, especially with inflation running at 8%, and higher interest rates would tend to slow economic activity.

Fed policy is restrictive for the economy, and bearish for the stock market. 

DateFed Funds Rate5 Year Treasury10 Year Treasury30 Year Treasury
Sep 20223.24.24.03.8
Aug 20222.53.02.83.0
Jul 20221.73.03.03.1
Jun 20221.03.03.03.1
May 20221.02.93.03.1
Apr 20220.52.72.72.8
Mar 20220.21.81.92.2
Feb 20220.21.82.02.3
Jan 20220.21.51.72.1
2021 Q40.21.21.51.9
2021 Q30.20.81.32.0
2021 Q20.20.81.62.3
2021 Q10.20.61.32.0
2020 Year0.40.60.91.6 – Covid
2019 Year2.21.92.22.6
2018 Year1.82.82.93.1 – Tax Cut
2017 Year1.01.92.32.9

Valuation:

S&P 500 earnings – Factset shows that for Q3 of 2022 earnings are projected to be up 3.2% above Q3 of last year, which is down from their projection last month of +6% earnings increase.

Lesson to be learned, projections of the future can be wrong, then you just change the number.

For CY 2022, Factset analysts are projecting earnings growth of 7.7%, down 2.3% from the projection in July.  

The forward PE for the S&P is 15.8 compared to the ten year average of 17. 

The 12 month forward earnings estimate on the S&P 500 from the Standard and Poor’s company is $229, down $3 from last month.

The outlook for earnings is bullish, but the earnings outlook is being trimmed.

PE on S&P 500 – The current 12-month trailing GAAP PE on the S&P 500 is 19.7, down from 21.0 last month and down from 31 a year ago.  I used 4 quarters of earnings with the most recent being Q2 2022.  We had a big rally in stock prices into mid-August that took the PE up, and we have a selloff in process that has taken the valuation back down.

This metric is fairly valued relative to my trimmed 30 year average of 19.  I trimmed out the quarters during recessions for my 30 year average, since the P/E behaves very abnormally during those times.  I go in 5 point increments for my terminology, so 20 – 25 would be moderately overvalued, while 25 – 30 would be significantly overvalued.  Above 30 would be dangerously overvalued.

Here is the risk with PE ratio.  With a peak in the 30’s, and an average of 19, what does that tell you?  The hard truth is for that to be true, it is also true that the PE ratio MUST spend some time below 19, well below in fact.  During bull times, the market overshoots to the upside, and in bear times, the market overshoots to the downside.  In bad bear markets, the PE has fallen to single digits, but an average bear market may only see PE’s go down to the 10 – 14 range, but that is much lower than today.

This indicator is neutral.

Age of primary move, bull or bear market – This bear market is 9 months old.  This is neither bullish nor bearish, but it is worthwhile to keep it in mind. 

Geo-Political:

COVID-19:  Covid has moderated in most countries.  Newer variants like Omicron are more transmissible but less lethal.  The Omicron BA.5 variant has been spreading and China is imposing lockdowns in various cities again.   

Liquidity:  Central banks globally are withdrawing emergency accommodation for Covid.  QE has ended and interest rates are rising.  We can expect a few rough spots in the transition back to normal monetary policy.

US Trade Relations:  The US trade delegation has met with the Chinese to begin discussions on a reset of the US – China trade agreements.  No progress has been made by July 2022.  At some point one has to wonder if that in fact is the way one or both countries want it, no concessions from China, and the US taking a tougher stance toward them on trade.  It appears to me that the US and China are engaged in a tug of war to see who is the world’s economic leader.  China has advantages in low cost labor and some natural resources such as rare earth metals, but they lack oil and natural gas.  The US has long been a technology leader and we have sophisticated financial markets that are usually well regulated.

Talks on the US getting back in the Iran nuclear deal are ongoing, but currently they are stalled.  With oil at over $80 a barrel, I suspect Iran thinks it gives them a negotiating chip if a deal was signed and Iranian crude was back on the market, which would lower oil prices.  Iran wants a guarantee from the US that they will honor the deal and not just decide to opt out like Trump did.  He could do that because the original Iran deal was never ratified by Congress.  Would Congress ratify a deal now?  Iran also wants the US to agree to end inspections of their facilities (which do not occur today, but would resume if a new deal is signed), and the US has said that is not acceptable.  If Iran wants a deal, they must accept inspections.

https://www.reuters.com/world/irans-raisi-questions-worth-nuclear-deal-without-an-end-iaea-probes-2022-09-22/

Ukraine:  Thewar in Ukraine drags on.  Ukraine is having more success on the battlefield than most expected, with the help of western weapons.  Russia is destroying much of eastern Ukraine’s cities and rebuilding will be difficult.  Sanctions against Russia are disrupting commodity markets since Russia was such a large exporter or oil, natural gas, and metals.  Ukraine was a large exporter of wheat and other foods and that export is hindered by the war.

Geo-politics is currently bearish, mainly due to the war in Ukraine.

Technical:

Technically the chart below is negative near term (months), but still positive longer term (year).

RSI at the top of the chart is neutral at 43, but it is falling.  Momentum shown by MACD at the bottom of the chart is negative and falling.  The price action is negative for the medium term, but still positive longer term. We are in a bear market.

One might observe that the stock prices have just recently fallen back into the 10 year up channel and are near the middle of the channel.  That begs the question, why do I say we are now in a bear market.  My answer is that the economy is large and complex and influenced by many different factors.  The pandemic, easy money from Congress, and zero interest rates from the Fed came together and allowed stock prices to rise far above the top of the 10 year up channel.  That is not normal behavior, so my view of the chart is not normal either.  If artificial events had not merged and allowed such a surge in stock prices and they had remained inside the channel, this correction would be much closer to the bottom of the channel.  I guess unusual economic events can result in an unusual looking chart.

Emergency accommodation is being removed from the monetary system.  The Fed ended Quantitative Easing (bond buying).  They have begun a series of rate hikes and they have begun shrinking their balance sheet.  All of the Fed’s actions reflect a tighter monetary policy to combat inflation.  This will slow the economy, it is INTENDED to slow the economy.  The question is can they slow the economy enough to get inflation down, and not so much that they drop the economy into a serious recession?  It is not easy to do with a large complex economy when your only tool is adjusting the Fed Funds rate.  If we go into a recession and the lower line of the ten year growth channel is pierced to the downside, then we would be in a bad bear market.

If you believe the stock market is a forecasting machine looking months ahead, that is what each of us must do to make our investment decisions for 2022.  You have to make your forecast, and then decide what to do about it.  Will things get better, stay about the same, or get worse?  Do you want to hold what you have through a recession, sell now, or wait until things get worse and sell at lower levels from here?  Where would you put your money, gold, bonds, stocks, money market?

S&P 500 – Ten Year Chart

This is bearish in the short run, but remains bullish longer term.

Conclusion:

  1. GDP growth is slowing with Q2 GDP shrinking by 0.6% following the negative print in Q1, so that is bearish
  2. The Fed has short term rates at 3.25%.  That is restrictive and bearish, and they are expected to continue tightening. 
  3. S&P earnings for Q2 are projected to be 3.2% above Q3 2021, with S&P projecting 7.7% improvement for calendar year 2022, keeping this factor bullish.  
  4. The PE valuation of the S&P based on the 12 month trailing GAAP number is 19.7, which is fairly valued and neutral.
  5. The geo-political factors are bearish.  
  6. Technically the chart looks bearish short term, but bullish longer term.

By that way of looking at it, the market is bearish, with one factor bullish, one neutral and four bearish.

Long Term Issues to Keep in Mind:

Federal Deficit:  (Updated March 2020) – Well this is going to get a lot worse.  Looks like the politicians are going to be printing money and dropping it from helicopters.  But all the other major economies will do the same thing, so relatively, the dollar may not drop much (which would be bad for inflation).

(Negative – Noted Jan. 2018)  The deficit will go up despite the republicans saying that if the tax cut bill is “dynamically scored” using “possible” increases in economic activity, it will hold down the deficit by increasing tax receipts.  This has not been shown to work in the past.  The US added $980 billion to the national debt in fiscal 2019 (ended 9/30/2019), a tragedy in good financial times.

The total national debt exceeds $26 Trillion (late 2020), and as interest rates rise, the component of the annual budget allocated to “interest on the debt” will increase, putting pressure on existing programs, or increasing the deficit.  If the deficit is allowed to rise too much in good economic times, the value of the dollar will fall and that is inflationary which is usually bad.  The thing saving us today is how poorly all the other nations are managing their economies, so the dollar continues to hold up.

Rich Comeau, Rich Investing

The Fed Clobbers the Market

I update each Saturday with my view of the stock market for the next few weeks (if occupied with family or travel, rarely I am a day or two late, just check back).  The monthly “Long Term” update will be on the fourth Wednesday of each month, and this supports investors who want to buy and hold, but want to sell to avoid the bulk of a primary bear market, and buy back in for most of the next bull market.

If you lose your bookmark to the blog, google “Rich Investing Blog” and it should show up on the first page or so.

The monthly Long Term update will be posted on Wed., Sept. 28.

My wife and I enjoyed a week in Seagrove Beach Florida, so I’m a day late with the post.

Economy:

Existing home sales are down substantially at an annualized rate of 4.8 million units.  Initial jobless claims were 213K, a low number indicating employers are still holding on to their workers.  The Fed would like to see some layoffs in order to cool off the current wage spiral contribution to inflation.  The index of leading economic indicators for August was -.3%, the sixth consecutive month of decline.  Three consecutive months of decline is a warning of a recession 6-9 months in the future, so this is now a strong warnings.

Geo-Political:

The Fed, as expected, raised the Fed Funds rate by .75% to 3.25% last Wednesday.  Powell sounded hawkish so there is no hope of a “pivot” to a more dovish stance any time soon.  The market took the news poorly with a strong selloff to end the week.  Powell said the current Fed Funds rate is just beginning to be “restrictive” to economic growth, but mortgage rates have already doubled to 6%, which is a major drag on home sales with home prices at these levels.  Home prices rose by 40% over two years (2020 and 2021) on ultra low interest rates and low supply.  Ultra-low interest rates are bad for savers who cannot earn a fair return on CD’s, and they encourage unwise financial choices by individuals and businesses.

Putin is faring poorly in Ukraine, with Ukraine forces taking back several cities previously captured by Russia.  Putin is doubling down declaring a mobilization of Russian forces in order to draft 300K troops.  People see the impact of the sanctions and there are protests in the street against the war.  Many people are fleeing Russia to avoid being drafted to fight in a war they consider unprovoked.  Putin may be at more risk but he has been in power so long that many layers of the government all owe their job to Putin.

In England, the new Prime Minister, Liz Truss, announced tax cuts for individuals and business.  For individuals, the tax cut is intended to offset sky high energy prices since the Ukraine war.  Truss feels the business tax cut is intended to stimulate business investment in the UK.  One thing is sure, the deficit will rise in the UK and with the pound already weak, it sank almost 4% on Friday.  That will raise the cost of imports by a similar amount and is inflationary in its own right.  The global markets were not impressed and this added to the US stock selloff.

https://www.cnn.com/2022/09/23/uk/liz-truss-jake-tapper-interview-intl/index.html

Technical Analysis:

For the week ending 9/23/2022, the S&P 500 was down 4.6%, that is six weekly declines in the last seven weeks.

Technically (see chart below) the market looks poor.  RSI at the top of the chart is negative at 30 (fully oversold) and falling.  Momentum shown by MACD at the bottom of the chart is negative and falling.  The price action is negative.

We are testing the June low and many analysts on CNBC expect it will be violated to the downside.  A couple of weeks ago I mentioned that Scott Minerd of Gugenheim thought the market would go down 20% by mid October, and another analyst said down 10%.  We are now down 15% from the August peak.  A saying going around on CNBC now is “nibble at 3400, bite at 3200, gorge at 3000”.  One thing this indicates is that nobody knows where the bottom of this market will be.  I will say that even the three above price levels could be wrong, things could actually get worse.  The wild card is the $31 trillion of debt the US carries, and with interest rates rising, the interest in the debt is becoming huge (currently $450 billion per year).

Click THIS LINK to open the chart in a separate window.

With the market fully oversold, we can look for a bounce soon.  “Soon” is relative, it could be next week, or in a few weeks, or a month or two.  In a bear market, an oversold market can get more oversold and stay oversold for an extended period.  Eventually there is a correction to the upside.  That could be the beginning of a new bull market, or a bear market rally.  With the Fed talking hawkish, I expect the next rally to just be a bear market rally, like the one from June to mid-August, but perhaps not so robust.

What am I doing?  I did not do much in the markets last week except watch.  I was at the beach most of the time, on vacation.  With interest rates rising, and approaching a value in the market not seen since the GFC (global financial crisis), I am thinking about what percent of my portfolio to put in fixed income (it was at zero last year).

You want to buy into a bond fund when interest rates are at a peak.  You will get the maximum yield in interest (on bonds they call it the “coupon” which is an old term associated with paper bonds that had coupons that you cut off and brought to the bank for your interest payment, called “clipping coupons”, which we don’t do any more).  Are we there yet?  I don’t think so, the Fed has to hike a few times.  I have hated bond funds for 13 years, but I am starting to warm up to one.  Then if the Fed has to lower rates to combat a recession, the bond values will rise giving you a capital gain on top of a nice coupon.  A 5% interest rate with 3 or 4% capital gain on top would be a nice year.  Not there yet.  And, in the long run, with the govt. over $30 trillion in debt, they have an incentive to bring interest rates down after they get inflation under control.

Go to stockcharts.com and enter TLT, the 20 year government treasury ETF, and you will see the principle value has been decimated in this rising rate environment.  The opposite will happen over a period of years, after the Fed stops raising rates.  If, as most observers now feel, the Fed induces a recession, eventually they will pivot to an easier rate policy, and as interest rates fall, the principal value of the bonds in the fund will rise.  The trick is picking the right time and I don’t think we are there yet.

One other tricky thing about the bond market is that the Fed can raise short term rates like the Fed Funds rate, but the market controls the longer term rates (unless the Fed is buying long duration bonds like they do during “quantitative easing”, which is unusual but does happen).  Normally you expect if the Fed hikes rates on the short end, bonds across the duration spectrum would also see yields rise.  But, if bond buyers think the Fed will produce hostile short term rates that will produce a recession in the future, the Fed may hike the Fed Funds rate, but longer duration bonds can see yields fall in anticipation of a recession, and lower rates in the future.  That produces an “inverted yield curve”, higher rate on the short duration bonds and lower rate on longer duration bonds, which sometimes forecasts a recession.

The bottom line, try to get a positive “real return” on your CD’s or bonds.  For instance right now we have a negative real return on bond because a one year CD yields 3.7% interest but inflation is 8.3%, so the real yield is minus 4.6%.  If we get inflation down to 4%, and you can get 5% on a five year CD, the real return is +1%, and if inflation returns to the Fed target of 2% in a couple of years, the real return could be as much as 3% annually.

Fidelity has about 8 money market funds and you should know which one you are in and what its yield is.  Mine will be yielding around 3% soon.

———————–   If you enjoy these updates, please tell your friends and family who are interested in the stock market about this blog.

I would like to call your attention to a page of my blog called “CLASSICS”.  It is located at the top of the blog, on the banner just under the title.  The banner has links to “Home”, “About”, and now “Classics”.  These are articles that I wrote one time for the blog, but they are valuable insights at all times for investors.  I will announce in the weekly blog when I add a new classic.

There are currently 3 Classic topics posted:

  1. Is it a bull market or a bear market?
  2. Why does healthcare cost so much?
  3. Implications of a large national debt. (posted August 2022)

Your comments and questions are always appreciated, so feel free to comment using the “Leave a Comment” feature just under the title of the post.

You can use the hyperlink below the chart of the S&P that will open a larger picture of the chart in a separate window.  The reader who suggested this wants to look at the chart side-by-side with the blog text.  If you bookmark the link to the chart you can look at it each day of the week to see how the market is progressing to certain milestones.  The picture in this post is a static .jpg so it does not update.

I am a retired person and preserving capital and seeking income are important objectives for me.  I also want a growth component to my portfolio, while minimizing major risk.  My style of investing will not suit everyone.  I like to sleep well at night.

Rich Comeau, Rich Investing

FDX Warns on Earnings

I update each Saturday with my view of the stock market for the next few weeks (if occupied with family or travel, rarely I am a day or two late, just check back).  The monthly “Long Term” update will be on the fourth Wednesday of each month, and this supports investors who want to buy and hold, but want to sell to avoid the bulk of a primary bear market, and buy back in for most of the next bull market.

If you lose your bookmark to the blog, google “Rich Investing Blog” and it should show up on the first page or so.

NOTE: The monthly Long Term update will now occur on the fourth Wednesday of the month.

Economy:

The big news of the week was that the CPI report on 9/13 showed a month over month rise of .1% (that’s 1.2% annualized) and the year over year print was 8.3%, down from 8.5% Y-o-Y last month.  Wall Street said inflation is not coming down fast enough, and the market sold off hard.  If the Fed was deciding between a .5% rate hike or .75% on 9/21, the table tilted toward .75%.  Jeff Gundlach, a bright bond trader, says we do not yet know all of the impact of the two .75% hikes over the summer and the Fed would be wise to slow the hikes down and only go .25%.  These rate hikes are causing analysts to caution on cuts to earnings estimates and that is what drives the stock market, earnings.

Initial jobless claims were steady in the normal range, so employers are hanging onto their employees.  Retail sales for August were up .3%. 

Geo-Political:

Ukraine has made some nice gains retaking land Russia captured previously, with the help of powerful US and European weapons, training and intelligence.  Putin says Russia is committed to achieve its original goals of the special military action (the war), but that is what you have to say if you get to the negotiating table, or your adversary will dictate peace terms to you.  Dissent against the war is out in the public, with mayors publicly calling for Putin to resign.

https://www.newsweek.com/russian-officials-demand-putin-resign-amid-ukraine-losses-1742156

If Russia enters peace talks, the stock market will pop up, at least temporarily.  If Putin leaves his post, will his successor be better or worse?

China continues to struggle with Covid-19 and their zero-Covid policy.

Sept. 7, 2022 – COVID-19 lockdowns are spreading across China as new outbreaks test the country’s long-standing zero-COVID policy. The outbreaks are small—compared to the rest of the world—and likely to be contained. But with around 313 million people under lockdown, including in major cities such as Chengdu and Shenzhen, China’s economic prospects look bleak. Even a small but deadly earthquake near Chengdu did nothing to shift COVID-19 policy in the region.

The odds of the political leadership lifting the zero-COVID policy this year remain slim. The directive would have to come straight from Chinese President Xi Jinping, and a major outbreak after relaxing restrictions would cost many officials their careers. The COVID-19 control apparatus has also taken on a life of its own, employing millions of people. Dismantling it will be hard—but that’s just one part of a set of policies that have trapped China in economic and political stagnation.

https://foreignpolicy.com/2022/09/07/china-covid-lockdown-economy-stagnation/

Technical Analysis:

For the week ending 9/16/2022, the S&P 500 was down 5%.

Technically (see chart below) the market looks poor.  RSI at the top of the chart is neutral at 40 and falling.  Momentum shown by MACD at the bottom of the chart is negative and falling.  The price action is negative both short and longer term.  It’s a bear market and this is what they do, they go down over time.  Periodically you get a bear market rally that takes the market up, in the hope the bear market is over.  It is not over, the Fed is still tightening and inflation (which must be killed to have a healthy economy) is too high.

Click THIS LINK to open the chart in a separate window.

The typical bear market lasts 9 months but longer ones can last a couple of years.  My concern for several years has been the large deficits presidents of both parties have run, since the last balanced budget under Bill Clinton in 2000.  The total national debt has risen too fast helping spur inflation, and now the Fed must raise rates into a stagnant economy, and that will probably produce a recession in 2023.  Normally rates are raised to cool an economy that is too hot and that may just slow the economy and not produce a recession.  But raising rates into a stagnant economy, one that has run on relatively low interest rates for the last 15 years, that is uncomfortable.

You may say “but Rich, you have said we are in a recession because we got two consecutive quarters of negative GDP in Q1 and Q2.  That is true, but even if we get a positive Q3 GDP print, there is something called a “double dip recession”, where you have a mild recession, get a quarter or two of slight positive GDP which technically ends the recession, and then you get a few more quarters of negative GDP putting you back in recession again.  Nobody ever said this investing was easy.

What am I doing?  I mostly stood by and watched in amazement!  I sold a few Put options, obligating me to buy stocks at lower prices.  I sold the CRWD I bought a couple of weeks ago, about break even.

———————–   If you enjoy these updates, please tell your friends and family who are interested in the stock market about this blog.

I would like to call your attention to a page of my blog called “CLASSICS”.  It is located at the top of the blog, on the banner just under the title.  The banner has links to “Home”, “About”, and now “Classics”.  These are articles that I wrote one time for the blog, but they are valuable insights at all times for investors.  I will announce in the weekly blog when I add a new classic.

There are currently 3 Classic topics posted:

  1. Is it a bull market or a bear market?
  2. Why does healthcare cost so much?
  3. Implications of a large national debt. (posted August 2022)

Your comments and questions are always appreciated, so feel free to comment using the “Leave a Comment” feature just under the title of the post.

You can use the hyperlink below the chart of the S&P that will open a larger picture of the chart in a separate window.  The reader who suggested this wants to look at the chart side-by-side with the blog text.  If you bookmark the link to the chart you can look at it each day of the week to see how the market is progressing to certain milestones.  The picture in this post is a static .jpg so it does not update.

I am a retired person and preserving capital and seeking income are important objectives for me.  I also want a growth component to my portfolio, while minimizing major risk.  My style of investing will not suit everyone.  I like to sleep well at night.

Rich Comeau, Rich Investing

Waiting on the CPI Data

I update each Saturday with my view of the stock market for the next few weeks (if occupied with family or travel, rarely I am a day or two late, just check back).  The monthly “Long Term” update will be on the fourth Wednesday of each month, and this supports investors who want to buy and hold, but want to sell to avoid the bulk of a primary bear market, and buy back in for most of the next bull market.

If you lose your bookmark to the blog, google “Rich Investing Blog” and it should show up on the first page or so.

NOTE: The monthly Long Term update will now occur on the fourth Wednesday of the month.

Economy:

The ISM services index rose slightly to 56.9, a good number.  Initial jobless claims for the prior week fell slightly to 222K, which is in the normal range. 

The most apparent sector having difficulty is housing, where the sales rate has dropped.  CNBC reported that of all the homes for sale, 25% reported the sellers dropped the price in the last month, which is historically a very high level.  That is the good news for buyers.  The bad news is that home values rose 40% in the last two years, and with mortgage rates at 6%, the small recent price drop still leaves home affordability well out of the reach of many potential buyers.

Geo-Political:

A huge problem for the world is the energy crisis in Europe, which started when Russia invaded Ukraine.  The EU sanctioned Russia, and Russia has retaliated by curbing sales of natural gas to Europe.  The problem is that without energy, Europe is close to falling into recession.  Russia can’t reroute nat gas pipelines so they are losing those sales, but most of their income was from oil and that can be put on tankers and shipped to China and India.  If Europe goes into a recession, they are a large trading partner with the US, so that will put a drag on the US economy.

Sept. 9, 2022 – FRANKFURT, Germany — Europe is facing an energy crisis that is squeezing ordinary people’s finances and in just a few weeks could mushroom into rolling blackouts and factory shutdowns. Already, many economists say a recession is on the way.

The cause: Russia has choked off the supplies of cheap natural gas that the continent depended on for years to run factories, generate electricity and heat homes. That has pushed European governments into a desperate scramble for new supplies and for ways to blunt the impact as economic growth slows and household utility bills rise.

On leaders’ plate right now: how to cushion the blow to the poor, who are hit the hardest by higher electricity, gas and food bills, and how to calm electricity and gas markets that have gone haywire, with fluctuating price increases of more than tenfold.

https://abcnews.go.com/Business/wireStory/explainer-europe-struggles-cope-russia-gas-shutoffs-89588824

The article is longer and well worth the read.

China GDP growth has slowed from 6% annually to 2.7%, due to their Covid “lockdown policy” that closes factories and limits mobility.  That limits sales of exports and domestic consumption.

Europe and China are our two largest trading partners, so when they slow down, we will suffer some slowdown also. 

Technical Analysis:

For the week ending 9/9/2022, the S&P 500 was up 4%.

Technically (see chart below) the market looks poor.  RSI at the top of the chart is neutral at 50 and rising.  Momentum shown by MACD at the bottom of the chart is neutral and looks like it is trying to turn up.  The price action is positive for the short term and negative longer term.  Last week I mentioned the only good thing technically was that we were nearly oversold and a bounce up was a possibility.

Click THIS LINK to open the chart in a separate window.

We get the CPI report on 9/13 and with gas prices falling at the pump, we might see the second monthly drop in inflation.  Maybe that is what this three day rally has been about, and a good number would allow the market to rally for a few more days.  Then all eyes will go the Fed news conference on 9/21 where they are expected to announce another .75% hike in the Fed Funds rate.  Stocks will probably not like that, but it is expected so may be priced in.  By Oct. 10, earnings season begins with the big banks reporting.  70% of US GDP is consumer spending, so if consumers are having a rough time, earnings will be weak.  The big surprise with Q2 earnings reported in July was how good they were, and the market rallied.  If investors see that earnings under-perform this time, stocks will fall.  We will get guidance from companies that will go into earnings estimates for 2023.  Most economists think current earnings estimates for 2023 are too high and need to be revised down.  Stocks would probably follow earnings estimates down.

I’m sorry for being a downer, but that’s the consensus of what I read and see on CNBC.

What am I doing?  Based on the chart reaching nearly oversold, I did a little buying last week, for a trade.  I could sell the stuff next week if we get a cool CPI number and stocks rally.  I bought a little IBM, MSFT and CRWD.  The cyber security companies are all richly valued because there are so many hackers trying to hold companies servers hostage for ransom.  That is why everyone needs cyber security, but I would try to buy the stock in a pullback.  In general I like quality now, big companies with earnings and hopefully dividends.  CRWD does not fit that mold, but I will probably be out of it next week.  I am keeping my buys small for now, in case we get another downdraft.  Then I would have dry powder to buy stocks at lower prices.

———————–   If you enjoy these updates, please tell your friends and family who are interested in the stock market about this blog.

I would like to call your attention to a page of my blog called “CLASSICS”.  It is located at the top of the blog, on the banner just under the title.  The banner has links to “Home”, “About”, and now “Classics”.  These are articles that I wrote one time for the blog, but they are valuable insights at all times for investors.  I will announce in the weekly blog when I add a new classic.

There are currently 3 Classic topics posted:

  1. Is it a bull market or a bear market?
  2. Why does healthcare cost so much?
  3. Implications of a large national debt. (posted August 2022)

Your comments and questions are always appreciated, so feel free to comment using the “Leave a Comment” feature just under the title of the post.

You can use the hyperlink below the chart of the S&P that will open a larger picture of the chart in a separate window.  The reader who suggested this wants to look at the chart side-by-side with the blog text.  If you bookmark the link to the chart you can look at it each day of the week to see how the market is progressing to certain milestones.  The picture in this post is a static .jpg so it does not update.

I am a retired person and preserving capital and seeking income are important objectives for me.  I also want a growth component to my portfolio, while minimizing major risk.  My style of investing will not suit everyone.  I like to sleep well at night.

The Bear Grinds On

I update each Saturday with my view of the stock market for the next few weeks (if occupied with family or travel, rarely I am a day or two late, just check back).  The monthly “Long Term” update will be on the second Wednesday of each month, and this supports investors who want to buy and hold, but want to sell to avoid the bulk of a primary bear market, and buy back in for most of the next bull market.

If you lose your bookmark to the blog, google “Rich Investing Blog” and it should show up on the first page or so.

Economy:

Initial jobless claims for the prior week were 232K, down from 237K.  The ISM manufacturing index for August was unchanged at 52.8 (anything over 50 shows growth).  The August employment report showed non-farm payrolls added 315K jobs, down from 526K in July.  The unemployment rate ticked up slightly to 3.7%.  Factory orders fell 1% in July after falling 1.8% in June, not a pretty picture there.

Everything is getting a little worse, according to the Fed’s plan.  This is what is necessary to bring down inflation, which the Fed mistakenly let get out of hand last year by failing to raise rates in the face of stubbornly high inflation.  Now they will possibly have to drop the economy into a recession in order to get the inflation genie back in the bottle.

Unfortunately there are a couple of big sectors that the Fed cannot control regarding inflation.  The Fed cannot control climate change and the two decade drought out west is severely limiting the water available to irrigate crops, so the drop in crop production will lead to higher food costs.  That is not the Fed’s problem to solve.  The drought this year, the worst in Texas since the 2011 drought year, is causing ranchers to sell off their cattle because they can’t afford to feed them.  Beef prices are low now because plenty of beef is going to market but in the future there will be a shortage of beef because the herds were liquidated over the summer.

Russia produced 7% of the world’s oil and since their invasion of Ukraine, the west has tried to wean itself off Russian crude, creating an apparent shortage situation.  Russia was also the primary supplier of nat gas to Europe and since the EU has imposed sanctions on Russia, they are withholding nat gas which is causing the price to skyrocket 6X in Europe.  Much of the fighting in the world today between the big economies occurs on the economic front.  Killing technology has just gotten too efficient for large standing armies to meet in the field, at least between the major powers.  So, Russia is using oil and nat gas to fight back against EU sanctions.  It’s economic warfare and the Fed has no control over it.

Geo-Political:

The market is swinging up or down based on the economic data.  When it shows lower inflation, even a little, the market goes up because the Fed may not have to be so tight.  When manufacturing is weak, the market may go up because the Fed may not have to be so tight.  When the jobs report is hot, the market may go down because investors are afraid the Fed will stay hawkish.  I just look at the inflation number and the last one was 8.5%, so I think the Fed stays hawkish for a while.

Typically interest rate hikes take six months to work into the economy, so the impact of the interest rate hike cycle is just beginning to be felt.  This month we also are scheduled to ramp up QT where the Fed will dispose of $95 billion per month of bonds off their balance sheet that must be absorbed by the bond market.  They are going to sop up the dollars they printed and gave away during the Covid crisis.  Expansionary policy of the money supply was good for the economy, contractionary policy will not.  The next Fed meeting is 9/20-21.

The trade war with China continues with a new escalation this week.  The US is halting shipment of top AI chips from NVIDAI to China as well as high end chips from AMD, perhaps in response to China’s military trials off the coast of Taiwan.

Sept. 1, 2022 – Chip designer Nvidia said that US officials told it to stop exporting two top computing chips for artificial intelligence work to China, a move that could cripple Chinese firms’ ability to carry out advanced work like image recognition.

The company on Wednesday said the ban, which affects its A100 and H100 chips designed to speed up machine learning tasks, could interfere with completion of developing the H100, the flagship chip Nvidia announced this year.

Nvidia said US officials told it the new rule “will address the risk that the covered products may be used in, or diverted to, a ‘military end use’ or ‘military end user’ in China.”

Asked for comment, the US department of Commerce would not say what new criteria it has laid out for AI chips that can no longer be shipped to China but said it is reviewing its China-related policies and practices to “keep advanced technologies out of the wrong hands”.

https://www.theguardian.com/world/2022/sep/01/us-blocks-sales-of-some-ai-chips-to-china-as-tech-crackdown-intensifies

China will respond, we just don’t know how yet.  NVDA and AMD were both down Friday the 2nd.

Technical Analysis:

For the week ending 9/2/2022, the S&P 500 was down 3%.

Technically (see chart below) the market looks poor (it’s a bear market).  RSI at the top of the chart is low-neutral at 36 and falling.  Momentum shown by MACD at the bottom of the chart is negative.  The price action is negative both short and longer term.  There is nothing to like there, except we are getting close to oversold.  The problem is that in a bear market, when you get oversold, you can get more oversold.  It does not act like it does in a bull market.

Click THIS LINK to open the chart in a separate window.

A typical bear market has three phases, the mirror opposite of the three phases in a bull market.

In phase 1, the market goes down rapidly while the pros cash out.  Main St. investors are in shock and don’t know what’s going on.  Bull markets last a long time and the average person is accustomed to “buy the dip” in bull markets, which is wrong in bear markets.  The decline is rapid and painful.

In phase 2, the average person has now gotten the memo and they cash some out of stocks, and the market grinds down.  It is not near as rapid a descent, but five or ten days of half-of-a-percent declines is bruising.  How long will this last?  It can feel like an eternity, but it usually lasts for some months.  It’s depressing.

In phase 3, that’s the capitulation phase.  Economic performance is poor, people are losing their jobs, people are losing much of their net worth if they have not cashed out, and investor psychology is DARK!  At this point, there is a buyer’s strike, there are very few buyers.  You will see a large spread between bid and ask prices.  Mutual funds may have to sell stocks to cash out customers selling their mutual funds, and that occurs in the last hour of trading.  If there are insufficient buyers, you can see stocks sold off at disturbing prices well below the value of the company.  Eventually ridiculous value is created in stocks, and the stage is set for the beginning of the next bull market.

It doesn’t have to be exactly like that, but that’s a rough outline.  I think we’re in phase 2 now.

What am I doing?  I did a little buying for long term holds.  I added a little JPM, JEPI, JNJ and IBB.  These may all go down until the bear market ends, and if they go down I will add more.  I have some low ball buy orders out such as IBM, just a little at 125, has not hit yet.  All of this can go down, but JPM, IBM, JNJ all have earnings and they have been around for a LONG time.  They all pay decent dividends so if they go down, they will pay you while you wait for them to go back up.

———————–   If you enjoy these updates, please tell your friends and family who are interested in the stock market about this blog.

I would like to call your attention to a page of my blog called “CLASSICS”.  It is located at the top of the blog, on the banner just under the title.  The banner has links to “Home”, “About”, and now “Classics”.  These are articles that I wrote one time for the blog, but they are valuable insights at all times for investors.  I will announce in the weekly blog when I add a new classic.

There are currently 3 Classic topics posted:

  1. Is it a bull market or a bear market?
  2. Why does healthcare cost so much?
  3. Implications of a large national debt. (posted August 2022)

Your comments and questions are always appreciated, so feel free to comment using the “Leave a Comment” feature just under the title of the post.

You can use the hyperlink below the chart of the S&P that will open a larger picture of the chart in a separate window.  The reader who suggested this wants to look at the chart side-by-side with the blog text.  If you bookmark the link to the chart you can look at it each day of the week to see how the market is progressing to certain milestones.  The picture in this post is a static .jpg so it does not update.

I am a retired person and preserving capital and seeking income are important objectives for me.  I also want a growth component to my portfolio, while minimizing major risk.  My style of investing will not suit everyone.  I like to sleep well at night.

Rich Comeau, Rich Investing

Interest Rates – Higher for Longer

I update each Saturday with my view of the stock market for the next few weeks (if occupied with family or travel, rarely I am a day or two late, just check back).  The monthly “Long Term” update will be on the second Wednesday of each month, and this supports investors who want to buy and hold, but want to sell to avoid the bulk of a primary bear market, and buy back in for most of the next bull market.

If you lose your bookmark to the blog, google “Rich Investing Blog” and it should show up on the first page or so.

Economy:

New home sales were weak in July coming in at 511K annualized, down from 585K the prior month.  Durable goods orders in July were flat, down from +2% the prior month.  Initial jobless claims in the prior week were 243K, down from 250K.  The second estimate of Q2 GDP was -.6%, revised up .3% from the first estimate.  The month over month PCE (Personal Consumption Expenditures price index) was minus .1%, the Y-o-Y PCE was +6.3% (down from 6.8% last month), and the Y-o-Y core PCE was 4.6%, down from 4.8% last month.  They all show the inflation rate is coming down A LITTLE and that’s good, but we have a long way to go to get to the Fed’s target of 2% inflation.  Consumer spending for July was up .2%, a minor improvement from the prior read of 0%.  The U. of Michigan consumer sentiment survey final for August was 58.2, a nice uptick from the prior 55.1.  Maybe its falling gas prices at the pump, or congress getting some bills passed.  You may not like every bill, but at least congress is showing they can get something done.

Geo-Political:

The big deal of the week was Fed Chairman Powell’s speech at Jackson Hole, and it sent the market into a tailspin on Friday the 26th.  From the speech:

  • Fed Chairman Jerome Powell on Friday pledged that the central bank will “use our tools forcefully” to attack inflation that is still running near its highest level in more than 40 years.
  • In his annual Jackson Hole, Wyoming, policy speech, Powell added that higher interest rates likely will persist “for some time. The historical record cautions strongly against prematurely loosening policy.”
  • The remarks come amid signs that inflation may have peaked but is not showing any marked signs of decline. Powell said the Fed will not be swayed by a month or two of data.

So, rates will be higher for longer than some market participants thought they heard from Powell after the last Fed meeting on July 27.  There won’t be an early pivot to more dovish policy, even if the economy is showing signs of stress such as recession and rising unemployment, until inflation has been brought down to the Fed target.  It is not that the Fed wants to produce a recession, they want to bring inflation down.  For the long run, high inflation is more damaging to more people than a recession has been.  Both are painful, but living with high inflation for a long time is worse, particularly for retirees.

There’s an old stock market saying, “don’t fight the Fed”.

Below is an excellent article on the economic challenges in Europe.  Most of their problems stem from Russia’s invasion of Ukraine, which caused Europe to sanction Russia, which has caused Russia to cut oil and natural gas exports to Europe.  With less supply and the same demand, prices of oil and natural gas have skyrocketed and boosted inflation up to 9%.  A major drought in Europe has dried up the rivers they have used for centuries to transport goods, so transportation costs are rising and hurting inflation.  Consumer spending is down in Europe and they face a looming recession in Europe.  If Europe and the US fall into recession at the same time, it is harder for both of them to get out.  If Asia were to fall into recession also, you would have a global recession, and that would be very bad.

https://www.reuters.com/world/europe/ukraine-war-drags-europes-economy-succumbs-crisis-2022-08-23/

Technical Analysis:

For the week ending 8/26/2022, the S&P 500 was down 4%.

Technically (see chart below) the market looks poor.  RSI at the top of the chart is neutral at 42 but it is falling.  Momentum shown by MACD at the bottom of the chart is negative.  The price action is negative both short and long term.

Click THIS LINK to open the chart in a separate window.

What am I doing?  Two weeks ago I thought the market may be near an interim peak so I sold a little stock (part of KMI) and I sold upside call options since those premiums were good.  With stocks falling last week I sold a few Put options because when stocks fall, the put premiums go up.  One put option I sold was on IBM at a $125 strike price.  When this put option expires, if IBM is selling below 125 per share, I will have to buy 100 shares at $125 per share and the option premium I got for selling the put option is deducted, so if I got $1.50 for selling the put option, my cost basis for IBM would be 123.50.  If IBM is selling at a price above 125 on the expiration day, let’s say 126, then the option holder will not “put” (or sell) the shares to me at 125 if he can sell them on the open market for 126.  So, the put option expired worthless, and I keep the option premium of 1.50 per share, or $150 dollars.  Obviously, you can get “assigned” (meaning you have to buy the shares) the shares, so you should only sell put options on stocks you would be OK owning at the strike price.  

———————–   If you enjoy these updates, please tell your friends and family who are interested in the stock market about this blog.

I would like to call your attention to a page of my blog called “CLASSICS”.  It is located at the top of the blog, on the banner just under the title.  The banner has links to “Home”, “About”, and now “Classics”.  These are articles that I wrote one time for the blog, but they are valuable insights at all times for investors.  I will announce in the weekly blog when I add a new classic.

There are currently 3 Classic topics posted:

  1. Is it a bull market or a bear market?
  2. Why does healthcare cost so much?
  3. Implications of a large national debt. (posted August 2022)

Your comments and questions are always appreciated, so feel free to comment using the “Leave a Comment” feature just under the title of the post.

You can use the hyperlink below the chart of the S&P that will open a larger picture of the chart in a separate window.  The reader who suggested this wants to look at the chart side-by-side with the blog text.  If you bookmark the link to the chart you can look at it each day of the week to see how the market is progressing to certain milestones.  The picture in this post is a static .jpg so it does not update.

I am a retired person and preserving capital and seeking income are important objectives for me.  I also want a growth component to my portfolio, while minimizing major risk.  My style of investing will not suit everyone.  I like to sleep well at night.

Rich Comeau, Rich Investing

Bear Market Rally Fades

I update each Saturday with my view of the stock market for the next few weeks (if occupied with family or travel, rarely I am a day or two late, just check back).  The monthly “Long Term” update will be on the second Wednesday of each month, and this supports investors who want to buy and hold, but want to sell to avoid the bulk of a primary bear market, and buy back in for most of the next bull market.

If you lose your bookmark to the blog, google “Rich Investing Blog” and it should show up on the first page or so.

I recently posted a new article on the “Classics” page called “Implications of a large national debt”.

Economy:

Retail sales for July were flat.  Initial jobless claims for the prior week were 250K, in line with recent data.  Existing home sales for July were down for the sixth straight month at an annualized rate of 4.8 million and it is clear that housing is in a recession.  The leading economic indicators fell for the fifth straight month (three straight months of decline forecasts a recession six to nine months in the future).

Every data point is flat or negative.  We’ve had two consecutive quarters of negative GDP.  Interest rates are rising and expected to continue rising into early 2023.  QT is set to ramp up in September.  The signs are not encouraging.

Geo-Political:

The Fed minutes from July were released and while many thought they heard Powell be a bit dovish in his press conference following the July meeting, the minutes do not indicate that.  Gasoline prices came down in the US which also made investors happy.  But, all Fed officials who have spoken say that if anyone interpreted Powell’s comments as dovish, they are incorrect.  Stocks did not like that and it started the pullback this week.  Next week the Fed governors meet for the annual Jackson Hole working vacation and I think we will hear the Fed governors tell the public again that rates will remain higher for longer.  I think they want to correct the investor’s mistaken interpretation of Powell’s comments at the July 27 press conference.  They don’t see a pivot anytime soon.  That could throw some more cold water on the stock market.

The US and Taiwan are holding talks on furthering trade and countering mainland China’s “economic coercion” against Taiwan and the US.  Read the article below for more details.

https://www.cnn.com/2022/08/18/business/taiwan-us-trade-talks-hnk-intl/index.html

In a direct issue with the US, China has ordered their next large order of jets from Airbus of France.  Boeing expected to get that order before the trade war got going.

BEIJING/SYDNEY, July 1 (Reuters) – China’s “Big Three” state airlines pledged on Friday to buy a total of almost 300 Airbus jets, the biggest order by Chinese carriers since the start of the COVID-19 pandemic and a breakthrough for Europe as Boeing remains partially frozen out of China.

In apparently coordinated announcements, Air China and China Southern Airlines said they would each buy 96 A320 neo-family jets worth $12.2 billion at list prices. China Eastern Airlines said it would buy 100 airplanes of the same type, worth $12.8 billion.

https://www.reuters.com/business/aerospace-defense/china-southern-airlines-buy-96-airbus-a320neo-jets-2022-07-01/

Technical Analysis:

For the week ending 8/19/2022, the S&P 500 was down about 1%.

Technically (see chart below) the market looks poor.  RSI at the top of the chart is neutral at 60 but falling slightly.  Momentum shown by MACD at the bottom of the chart is neutral, but it appears to be in the process of rolling over to head down.  The price action has come a long way up since the mid-June low but it has bumped into resistance at the 200 day moving average and the second “fan line” which is black.  The market corrected a little last week to the downside.  If the rally over the last two months is just a bear market rally, I would expect some more downside action over the next few weeks.

Last week I talked about beginning to buy in at interim lows.  Look for quality stocks, not speculative ones.  Nobody knows where the lowest low of the bear market will occur.  It could be next month, or sometime in 2023.  If the bear market rally is over and the primary trend that is a bear market resumes, we may get a buying opportunity in the next couple of months.

Click THIS LINK to open the chart in a separate window.

What am I doing?  I didn’t do much, just noodled with a few option deals.  I did sell 1/3 of my KMI because I thought we were at a bear market rally peak and I hope to buy it back at a lower price.  The market and the stock were both overbought (RSI at 70), and the market looked like it would correct down.  There is no rule that says KMI will also correct down, and the nat gas pipeline business is strong, but if KMI does not correct I still have 2/3 of my original holding.

———————–   If you enjoy these updates, please tell your friends and family who are interested in the stock market about this blog.

I would like to call your attention to a page of my blog called “CLASSICS”.  It is located at the top of the blog, on the banner just under the title.  The banner has links to “Home”, “About”, and now “Classics”.  These are articles that I wrote one time for the blog, but they are valuable insights at all times for investors.  I will announce in the weekly blog when I add a new classic.

There are currently 3 Classic topics posted:

  1. Is it a bull market or a bear market?
  2. Why does healthcare cost so much?
  3. Implications of a large national debt. (posted August 2022)

Your comments and questions are always appreciated, so feel free to comment using the “Leave a Comment” feature just under the title of the post.

You can use the hyperlink below the chart of the S&P that will open a larger picture of the chart in a separate window.  The reader who suggested this wants to look at the chart side-by-side with the blog text.  If you bookmark the link to the chart you can look at it each day of the week to see how the market is progressing to certain milestones.  The picture in this post is a static .jpg so it does not update.

I am a retired person and preserving capital and seeking income are important objectives for me.  I also want a growth component to my portfolio, while minimizing major risk.  My style of investing will not suit everyone.  I like to sleep well at night.

Rich Comeau, Rich Investing

Inflation is Abating (not so much!)

I update each Saturday with my view of the stock market for the next few weeks (if occupied with family or travel, rarely I am a day or two late, just check back).  The monthly “Long Term” update will be on the second Wednesday of each month, and this supports investors who want to buy and hold, but want to sell to avoid the bulk of a primary bear market, and buy back in for most of the next bull market.

If you lose your bookmark to the blog, google “Rich Investing Blog” and it should show up on the first page or so.

The monthly Long Term update was posted Wednesday and follows below this post on the website.

I added a new article to the “Classics” page, titled “Implications of a Large National Debt”.

Economy:

The CPI for the month of July was unchanged, down from an increase of 1.3% in June.  1.3% looks too high for a one month change, and zero looks too low, sometimes because of how the data comes in you should average those numbers.  But, the zero for July does not make a trend, let’s see what happens in August.  The Y-o-Y CPI was +8.5%, down from the 9.1% rate last month.  That’s headed in the right direction, but again, one month is not a trend.  The Producer Price Index (PPI) for July was -.5%, another number headed in the right direction for the moment.  The market seemed very positive with these readings and rallied.  My take is it was an over-reaction to the upside, but let’s see.  Action in the bond market indicated they thought the Fed may only raise by .5% in Sept. instead of .75%.

Initial jobless claims came in at 262K, in line with recent history.

Geo-Political:

We’ll skip the geo-politics this week and talk some market strategy.

When should you allocate more funds to the stock market, if you have significant cash on the sidelines?

The first thing I would point out is that while bonds and CD’s have not given an attractive yield in the last decade, we are probably approaching a time when they will, assuming we can get inflation back to the Fed target of 2% annually (maybe in 2 years).  The return on fixed income won’t be that great, but you don’t have to watch the markets like a hawk, and they don’t crater in value when the stock market goes down.  Figure out how much you want in fixed income going forward.

Regarding the stock market, we are in a bear market.  Does that mean you should not buy stocks?  No, it does not mean that.  In fact, the best time to buy is at a bear market bottom, when valuations have been washed out and you can buy stocks when the PE ratio is low.  Most recently you could look back to April of 2020 at the pandemic low, buying stocks there worked out very well.  Look back to March 2009, the GFC low, and that worked out very well also.  The problem is finding the bear market low; they don’t ring a bell at the bottom.  The good news is that you don’t have to hit the exact day.  This will be like horse shoes and hand grenades, CLOSE WILL COUNT.

A general observation, buying in does not have to happen all on the same day.  When the market is way down, commit 5% or 10% of your funds.  Look at the monthly Long Term updates, and if you see the PE is seriously low, like between 10 and 14 (or lower), maybe commit a higher percent of the cash you want to allocate to stocks, like 20% or 30%.  You will probably miss the exact bottom and that’s OK.  You will be “buying low”.  If the market goes lower, realize that could happen and if you have cash you want to allocate to stocks, buy more.  Now, all of those buys will probably have to be held for at least two years.  Depending on market conditions you may hold longer, sometimes much longer.

The flip side is that when PE valuations get substantially overvalued and especially dangerously overvalued like last spring and summer, it is time to start lightening up on stocks.  I did that by selling covered calls and the market was moving up so fast many of my stocks got called, which was not my intention when I sold the call.  But when the stock got called, I did not buy back in, I raised my cash position.  By late fall I held about 60% cash, which served me well during the downturn.  I got hurt badly on several stocks like PYPL, but my portfolio performed much better than the S&P 500.

Unfortunately this strategy is the opposite of what many inexperienced investors do.  At a bear market bottom they have lost a lot of money and think the craziest thing they could do it buy stocks.  They get frustrated by their losses and in a capitulation selloff, they sell their stocks.  Eventually a new bull market takes hold, but they are too scared to buy stocks.  Eventually it is clear everyone else is making money in a raging bull market and they buy in, sometimes near the top when the market is overvalued  and ready to head down.

The time to sell was last fall.  Now we are entering a zone where we are looking for a spot or spots to buy.

I hope that gives you some food for thought.

Technical Analysis:

For the week ending 8/12/2022, the S&P 500 was up about 3% on less aggressive inflation data.

Technically (see chart below) the market looks poor.  RSI at the top of the chart is overbought at 70.  Momentum shown by MACD at the bottom of the chart is positive and rising.  The price action is positive short term but still negative medium term.  The longer down-sloping black line is the second fan line, which is in the area of the 200 day moving average (thin red line at 4230).  Those are technical resistance for the market to overcome.  Fan lines usually come in three’s, so that has not happened yet (it does not have to happen).

Click THIS LINK to open the chart in a separate window.

Inflation is still too hot, the Fed is still raising interest rates.  Corporate guidance this earnings season has been cautious.  When the govt. stops selling oil out of the strategic reserve, I wonder what will happen to the price of oil and gas at the pump?  That could spook the market in a couple of months.

Also looming a few months ahead, Germany is set to stop importing Russian oil, and they have already stopped importing Russian coal.  The EU has a similar plan.  I am not sure this is feasible, and how German’s will react to the sacrifice they will be asked to make.  On the other hand, you have a wild Russia romping in Eastern Europe, and the rest of Europe seems committed to saying to Russia, that is not acceptable and we will oppose you economically.  It will be very interesting to see if that sticks.  Who can hold out longer, Europe and Germany in particular, or Russia?  The odds of a recession in Europe rise, or of a deeper recession.  A deeper recession in Europe will be a burden on the US economy by limiting our ability to export to Europe.  That won’t be in effect until the winter.  (You caught me sneaking in a little geo-political…)

https://www.reuters.com/business/energy/germany-says-it-will-stop-buying-russian-coal-aug-1-oil-dec-31-2022-07-13/

What am I doing?  I put in some lowball buy orders in case we get a pullback on a stock like LNG or BAC.  I don’t want to buy into this overbought market.

———————–   If you enjoy these updates, please tell your friends and family who are interested in the stock market about this blog.

I would like to call your attention to a page of my blog called “CLASSICS”.  It is located at the top of the blog, on the banner just under the title.  The banner has links to “Home”, “About”, and now “Classics”.  These are articles that I wrote one time for the blog, but they are valuable insights at all times for investors.  I will announce in the weekly blog when I add a new classic.

Your comments and questions are always appreciated, so feel free to comment using the “Leave a Comment” feature just under the title of the post.

You can use the hyperlink below the chart of the S&P that will open a larger picture of the chart in a separate window.  The reader who suggested this wants to look at the chart side-by-side with the blog text.  If you bookmark the link to the chart you can look at it each day of the week to see how the market is progressing to certain milestones.  The picture in this post is a static .jpg so it does not update.

I am a retired person and preserving capital and seeking income are important objectives for me.  I also want a growth component to my portfolio, while minimizing major risk.  My style of investing will not suit everyone.  I like to sleep well at night.

Rich Comeau, Rich Investing

Long Term – August 2022

Once a month, on the second Wednesday of the month, I will put up a long term view of the market.  This is provided for investors who don’t want to trade secondary swings in the market, but would like to exit the stock market relatively soon after a bear market begins, or enter the market after a new bull market begins (change in the primary trend).  In the blog, they will always have a title called “Long Term (month) (year)”, so you can use your browser “Find” function and easily find them.

Economics:

GDP – The first estimate of 2022 Q2 GDP released in late July was -0.9%.  Two consecutive quarters of negative GDP is a common definition of a recession, so here we are.  There are more complicated definitions of what a recession is, buy I don’t think my readers are interested in an academic discussion, so we’ll stick with the common definition.  Some say that there is not a general disruption in the economy and unemployment if very low at 3.5%, so we are not in a recession.  I would say that using the common definition of recession, we are in a mild recession, so far.

This is bearish for the stock market.

YearQuarterGDP %
2022Q2-0.9%
2022Q1-1.6%
   
2021Q46.9%
2021Q32.0%
2021Q26.7%
2021Q16.4%
   
2020Year0.1
2019Year2.3
2018Year2.9
2017Year2.6
2016Year2.0

Fed interest rates – The Fed raised the Fed Funds rate by .75% in late July, as expected.  That brought the Fed Funds rate to 2.5%, up from zero in February.  The Fed indicated that 2.5% is presumed to be the “neutral rate” for the economy, which is neither accommodative nor restrictive.  Unfortunately with inflation running at 9% on the CPI, we need a restrictive rate to slow the economy in order to bring down inflation.  The Fed remains behind the curve on interest rates in my opinion.

The impact on mortgage rates has been more dramatic taking the rate on a 30 year fixed mortgage from 3% to 5%, and housing is seeing a slowdown.  That will dampen inflation going forward. 

The other thing the Fed is doing is Quantitative Tightening (QT), which means they are not buying bonds to replace those that they hold when they mature, and outright selling bonds into the secondary market.  This will force private companies and individuals to buy the bonds, and then those dollars are not available to buy TV’s, boats, or other big ticket items.  Private investors may demand a higher interest rate, especially with inflation running at 9%, and higher interest rates would tend to slow economic activity.

Fed policy is neutral. 

DateFed Funds Rate5 Year Treasury10 Year Treasury30 Year Treasury
Aug2.53.02.83.0
Jul 20221.73.03.03.1
Jun 20221.03.03.03.1
May 20221.02.93.03.1
Apr 20220.52.72.72.8
Mar 20220.21.81.92.2
Feb 20220.21.82.02.3
Jan 20220.21.51.72.1
2021 Q40.21.21.51.9
2021 Q30.20.81.32.0
2021 Q20.20.81.62.3
2021 Q10.20.61.32.0
2020 Year0.40.60.91.6 – Covid
2019 Year2.21.92.22.6
2018 Year1.82.82.93.1 – Tax Cut
2017 Year1.01.92.32.9

Valuation:

S&P 500 earnings – Factset shows that for Q2 of 2022 earnings are are coming in 6.7% above Q2 of last year.  That would make Q2 the lowest profit growth quarter since Q4 2020.

Factset’s projection of Q3 earnings is +6% over last year’s Q3 which is good.

For CY 2022, Factset analysts are projecting earnings growth of 9.0%, one percent lower than the projection was last month.

The forward PE for the S&P is 17.5 compared to the ten year average of 17. 

The 12 month forward earnings estimate on the S&P 500 from the Standard and Poor’s company is $232, up $9 from last month.

The outlook for earnings is bullish.

PE on S&P 500 – The current 12-month trailing GAAP PE on the S&P 500 is 21.0, up from 19.7 last month and down from 31 a year ago.  I used 4 quarters of earnings with the most recent being Q2 2022. 

This metric is moderately overvalued relative to my trimmed 30 year average of 19.  I trimmed out the quarters during recessions for my 30 year average, since the P/E behaves very abnormally during those times.  I go in 5 point increments for my terminology, so 20 – 25 would be moderately overvalued, while 25 – 30 would be significantly overvalued.  Above 30 would be dangerously overvalued.

Here is the risk with PE ratio.  With a peak in the 30’s, and an average of 19, what does that tell you?  The hard truth is for that to be true, it is also true that the PE ratio MUST spend some time below 19, well below in fact.  During bull times, the market overshoots to the upside, and in bear times, the market overshoots to the downside.  In bad bear markets, the PE has fallen to single digits, but an average bear market may only see PE’s go down to the 10 – 14 range, but that is much lower than today.

This indicator is bearish.

Age of primary move, bull or bear market – This bear market is 7 months old.  This is neither bullish nor bearish, but it is worthwhile to keep it in mind. 

Geo-Political:

COVID-19:  Covid has moderated in most countries.  Newer variants like Omicron are more transmissible but less lethal.  China had an outbreak in Shanghai which was locked down for a couple of months but had re-opened.  The Omicron BA.5 variant has been spreading and China is imposing curbs in various cities again.   

Liquidity:  Central banks globally are withdrawing emergency accommodation for Covid.  QE has ended and interest rates are rising.  We can expect a few rough spots in the transition back to normal monetary policy.

US Trade Relations:  The US trade delegation has met with the Chinese to begin discussions on a reset of the US – China trade agreements.  No progress has been made by July 2022.  At some point one has to wonder if that in fact is the way one or both countries want it, no concessions from China, and the US taking a tougher stance toward them on trade.  It appears to me that the US and China are engaged in a tug of war to see who is the world’s economic leader.  China has advantages in low cost labor and some natural resources such as rare earth metals, but they lack oil and natural gas.  The US has long been a technology leader and we have sophisticated financial markets that are usually well regulated.

Talks on the US getting back in the Iran nuclear deal are ongoing, but currently they are stalled.  With oil at over $100 a barrel, I suspect Iran thinks it gives them a negotiating chip if a deal was signed and Iranian crude was back on the market, which would lower oil prices.  They will try to extract an item from the US to make a deal.  That’s just my thought.  Another thought is that Iran is so close to the bomb that they will stall the talks and complete a bomb.  Iran appears ready to sell military drones to Russia for use in Ukraine. 

https://www.reuters.com/world/middle-east/iran-mps-set-conditions-reviving-2015-nuclear-deal-amid-stalled-talks-2022-04-10/

Ukraine:  Thewar in Ukraine drags on.  Ukraine is having more success on the battlefield than most expected, with the help of western weapons.  Russia is destroying much of eastern Ukraine’s cities and rebuilding will be difficult.  Sanctions against Russia are disrupting commodity markets since Russia was such a large exporter or oil, natural gas, and metals.  Ukraine was a large exporter of wheat and other foods and that export is hindered by the war.

Geo-politics is currently bearish, mainly due to the war in Ukraine.

Technical:

Technically the chart below is negative near term (months), but still positive longer term (year).

RSI at the top of the chart is neutral at 54.  Momentum shown by MACD at the bottom of the chart is negative and falling.  The price action is negative for the medium term, but still positive longer term. We are in a bear market.

One might observe that the stock prices have just recently fallen back into the 10 year up channel and are near the middle of the channel.  That begs the question, why do I say we are now in a bear market.  My answer is that the economy is large and complex and influenced by many different factors.  The pandemic, easy money from Congress, and zero interest rates from the Fed came together and allowed stock prices to rise far above the top of the 10 year up channel.  That is not normal behavior, so my view of the chart is not normal either.  If artificial events had not merged and allowed such a surge in stock prices and they had remained inside the channel, this correction would be much closer to the bottom of the channel.  I guess unusual economic events can result in an unusual looking chart.

Emergency accommodation is being removed from the monetary system.  The Fed ended Quantitative Easing (bond buying).  They have begun a series of rate hikes and they have begin shrinking their balance sheet.  All of the Fed’s actions reflect a tighter monetary policy to combat inflation.  This will slow the economy, it is INTENDED to slow the economy.  The question is can they slow the economy enough to get inflation down, and not so much that they drop the economy into a recession?  It is not easy to do with a large complex economy when your only tool is adjusting the Fed Funds rate.  If we go into a recession and the lower line of the ten year growth channel is pierced to the downside, then we would be in a bad bear market.

If you believe the stock market is a forecasting machine looking months ahead, that is what each of us must do to make our investment decisions for 2022.  You have to make your forecast, and then decide what to do about it.  Will things get better, stay about the same, or get worse?  Do you want to hold what you have through a recession if one hits, sell now in case one hits, wait until things get worse confirming a recession and sell at lower levels from here?  Where would you put your money, gold, bonds, stocks, money market?

Once a month, on the second Wednesday of the month, I will put up a long term view of the market.  This is provided for investors who don’t want to trade secondary swings in the market, but would like to exit the stock market relatively soon after a bear market begins, or enter the market after a new bull market begins (change in the primary trend).  In the blog, they will always have a title called “Long Term (month) (year)”, so you can use your browser “Find” function and easily find them.

S&P 500 Ten Year Chart

This is bearish in the short run, but remains bullish longer term.

Conclusion:

  1. GDP growth is slowing with Q2 GDP shrinking by 0.9% following the negative print in Q1, so that is bearish
  2. The Fed has short term rates at 2.5%.  That is still low which is neutral near-term, but they are expected to continue tightening. 
  3. S&P earnings for Q2 are projected to be 6.7% above Q2 2021, with S&P projecting 9% improvement for calendar year 2022, keeping this factor bullish.  
  4. The PE valuation of the S&P based on the 12 month trailing GAAP number is 21, which is moderately overvalued and bearish.
  5. The geo-political factors are bearish.  
  6. Technically the chart looks bearish short term, but bullish longer term.

By that way of looking at it, the market is bearish, with one factor bullish, one neutral and four bearish.

Long Term Issues to Keep in Mind:

Federal Deficit:  (Updated March 2020) – Well this is going to get a lot worse.  Looks like the politicians are going to be printing money and dropping it from helicopters.  But all the other major economies will do the same thing, so relatively, the dollar may not drop much (which would be bad for inflation).

(Negative – Noted Jan. 2018)  The deficit will go up despite the republicans saying that if the tax cut bill is “dynamically scored” using “possible” increases in economic activity, it will hold down the deficit by increasing tax receipts.  This has not been shown to work in the past.  The US added $980 billion to the national debt in fiscal 2019 (ended 9/30/2019), a tragedy in good financial times.

The total national debt exceeds $26 Trillion (late 2020), and as interest rates rise, the component of the annual budget allocated to “interest on the debt” will increase, putting pressure on existing programs, or increasing the deficit.  If the deficit is allowed to rise too much in good economic times, the value of the dollar will fall and that is inflationary which is usually bad.  The thing saving us today is how poorly all the other nations are managing their economies, so the dollar continues to hold up.

Rich Comeau, Rich Investing

The Jobs Report was HOT!

I update each Saturday with my view of the stock market for the next few weeks (if occupied with family or travel, rarely I am a day or two late, just check back).  The monthly “Long Term” update will be on the second Wednesday of each month, and this supports investors who want to buy and hold, but want to sell to avoid the bulk of a primary bear market, and buy back in for most of the next bull market.

If you lose your bookmark to the blog, google “Rich Investing Blog” and it should show up on the first page or so.

The monthly Long Term report will be posted on Wed. the 10th.

Economy:

The July ISM manufacturing index was 52.8, flat with last month.  The ISM services index was 56.7, up about 1 point from last month.  Anything over 50 shows growth, but this is down from the 60 range last fall.  Motor vehicle sales for July ran at a 13.5 million unit annualized rate, up a tad from June.  Maybe the chip shortage is beginning to thaw.  Factory orders were up 2% in June.  Initial jobless claims for the prior week were 260K, flat with the prior two weeks. 

The big number for the week was the July jobs report, where non-farm payrolls increased by a strong 528K and the unemployment rate fell to 3.5%.  On that seemingly good news of robust job creation, the stock market went down on Friday.  Does that seem strange?  It is, in this market, good news can be bad news.  While the market has rallied recently, helped by Powell’s comments that some took as dovish (but other Fed Governors said they were not dovish), this hot jobs report caused people to project that Powell will continue to raise rates in September, either .5% or .75%, and not pause the rate hikes.  The stock market did not like it.  People will consider what it means over the weekend and we will see how they feel on Monday.

The next CPI report will be on Wednesday and that is important in this time of inflation.

Geo-Political:

The most interesting issue was Pelosi’s trip to Taiwan, and China’s reaction to it.  As China has grown into the second largest economy in the world, it is clear they have become economic rivals and will no longer do a favor for each other.  All interactions will be judged by what they do for one side, and for the other side as well.  Both sides have moved from a win-win positioning to “I win, you lose”.  Both economies became entangled over the prior three decades, and untangling won’t be easy.

I saw that Australia and England both raised their interest rate by half a percent.  Everyone is tightening to fight inflation, except Japan.

Technical Analysis:

For the week ending 8/5/2022, the S&P 500 was up .5%.

Technically (see chart below) the market looks poor, with a question mark about whether the recent rally is a bear market rally or the start of a new bull market.  RSI at the top of the chart is in high neutral at 65, but that can be overbought in a bear market.  Momentum shown by MACD at the bottom of the chart is positive, but perhaps too positive (notice the histograms are beginning to shrink).  The price action is positive for the short term, but negative longer term.

Someone suggested the chart was messy, so I cut it down to the basic for now.  You see my interpretation of where the downtrend is with the two purple lines falling to the right.  Now we have a breakout above the top of the channel, which may or may not signify a change in the primary direction which is currently bearish.  We watch to see if the breakout has both magnitude and duration.  Another option is that after the significant move down since January, the market needs a breather and we go into a trading range.  I think it is a bear market rally.

Interest rates become apparent in the economy with a lag, usually six months.  The Fed’s hikes in March – July will be in the numbers by Q3 earnings reports in October.  Suppose revenue is up 6%, but inflation is still 6%.  Is business better, or has it stagnated and does inflation account for all of the revenue increase?  Judging corporate performance is going to be trickier.

Click THIS LINK to open the chart in a separate window.

What am I doing?  It was a quiet week for me.  I sold a few covered calls.  I did some reading about the holdings of the JEPI ETF (JP Morgan Equity Premium Income) that I hold.  There was a holding I was not familiar with, called an “Equity Linked Note” (ELN), and an article about the ELN is at the link below this paragraph.  The fund managers also sell covered calls against stocks in the portfolio, which is a safe way to capture a little more yield.  Finviz.com shows the yield at 9%, but when I bought in the yield was 7%, so the yield is not stable, but the asset value in only down 5% since Jan., better than most of the market.  The seven month price range is 52 – 60.  I have an order to buy some more at 54, while today’s price is 57.  I have sold a covered call on JEPI, but the trading is so thin that sometimes I could not get a buyer.  The fund pays monthly around the 4th day of the month.

https://www.investopedia.com/terms/e/equity-linkednote.asp

———————–   If you enjoy these updates, please tell your friends and family who are interested in the stock market about this blog.

I would like to call your attention to a page of my blog called “CLASSICS”.  It is located at the top of the blog, on the banner just under the title.  The banner has links to “Home”, “About”, and now “Classics”.  These are articles that I wrote one time for the blog, but they are valuable insights at all times for investors.  I will announce in the weekly blog when I add a new classic.

Your comments and questions are always appreciated, so feel free to comment using the “Leave a Comment” feature just under the title of the post.

You can use the hyperlink below the chart of the S&P that will open a larger picture of the chart in a separate window.  The reader who suggested this wants to look at the chart side-by-side with the blog text.  If you bookmark the link to the chart you can look at it each day of the week to see how the market is progressing to certain milestones.  The picture in this post is a static .jpg so it does not update.

I am a retired person and preserving capital and seeking income are important objectives for me.  I also want a growth component to my portfolio, while minimizing major risk.  My style of investing will not suit everyone.  I like to sleep well at night.

Rich Comeau, Rich Investing