After the rout of September, sorry to break this to you, but stock markets historically have experienced well-above-average volatility in October. It’s often a spooky month for stocks and several of the greatest crashes in stock market history have occurred during the month, including ‘Black Tuesday’ and ‘Black Thursday’ in 1929, as well as ‘Black Monday’ in 1987 and the worst of the 2008 financial crisis meltdown. Some have dubbed this the ‘October Effect’.
Guggenheim Securities Chief Investment Officer Scott Minerd said that he expects stocks to fall another 20% by mid-October, citing a connection between price-to-earnings ratios and inflation. “We should see stocks fall another 20% by mid-October…if historical seasonals mean anything,” Minerd said in a tweet.
The Fed has already raised its benchmark interest rate by 300 basis points this year as it fights to bring inflation back under control. And more hikes are expected. We will get more data of course, during the month, but one to watch is the feedback loop between U.S. stocks and bonds.
With the S&P 500 is down more than 20% on the year and showing no signs of hitting a floor, remember the valuation for the index remains elevated, and earnings estimates have only started to turn lower and may fall further as earnings season nears. Additionally, high yield spreads are widening, and volatility measures show that investors’ mood is complacent.
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This past week was momentous, as Central Banks continued to lift rates in an attempt to crush inflation. A half dozen central banks, including in the United States, Britain, Sweden, Switzerland and Norway, delivered rate hikes this week to fight inflation, but it was the Fed’s signal that it expects high U.S. rates to last through 2023 that caught markets off guard.
“There had been some optimists out there saying that inflation may be coming under control, but the Fed effectively told them to sit down and shut up,” said David Russell, VP of market intelligence at TradeStation Group. “The Fed is trying to rip the band-aid off, trying to kill inflation while the jobs market is still strong.”
So finally, I think markets are waking up to what’s happening – no immediate pivot, higher rates for longer – and even if house prices or markets fall.
Goldman slashed its year-end target for the S&P 500 to 3600 from 4300, which it had made in mid-August. “The expected path of interest rates is now higher than we previously assumed, which tilts the distribution of equity market outcomes below our prior forecast.”
“Based on our client discussions, a majority of equity investors have adopted the view that a hard landing scenario is inevitable, and their focus is on the timing, magnitude, and duration of a potential recession and investment strategies for that outlook.”
Federal Reserve chairman Jerome Powell said the US economy may be entering a “new normal” following disruptions from the COVID-19 pandemic. “We continue to deal with an exceptionally unusual set of disruptions,” Powell told business and community leaders at a Fed Listens event in Washington.
Digital Finance Analytics (DFA) Blog
Bears Are Showing Their Teeth: Be Clear, Markets Have Further To Fall! [Podcast]
This is an edited edition of live discussion about the current state of the markets with Tony Locatro, Perth based Investment Manager with Alto Capital. We will pick apart the latest movements and consider the implications for wealth protection and growth. Tony specialises in the small cap sector.
In this week’s market review we explore the fragile upswing in the second half of the week, which can best be understood as a positioning by speculators, betting on a falling market, typically seen as part of a bear market rally sequence, then anything substantive.
I believe the markets are still not fully factoring the evaporation of a FED pivot at least for now, despite the intense and heightened rhetoric. Indeed, as I discussed yesterday, the current bout of inflation has predominately been caused by over stimulation thanks to ultra-low-rate settings, quantitative easing and loose fiscal measures (i.e., Government stimulus).
The truth is this is now coming undone. Thus, I do not regard the slight end of week upswing as a significant turn. As normal, we will start in the US, such a globally dominate market, then cover Europe, Asia and end in Australia.
Digital Finance Analytics (DFA) Blog
Speculators Let Rip As Central Banks Talk Up Higher Rates... [Podcast]
This past week has seen a significant shift in market sentiment, driven off the back of hawkish tones from Jackson Hole, as Central Bankers underscored that squashing inflation was their main task, whatever the cost. Markets had been betting on a Fed Pivot soon (recalling the last cycle where markets had their way and the Fed turned), hence the bear market run-up in the past couple of months, but that for now is in tatters.
Further falls into a typically wobbly September can be expected. Mind you, the FED has not explained why their forecasts were so off, so it does beg the question as to whether we should believe them now.
And consider the wider fallout globally, as higher rates and a strong dollar will put many markets and countries under pressure. Note the swing between the USD and Yuan, and the Yen. Perhaps this is not accidental. Plus, the markets are worried about “China slowing, euro zone recession and a hawkish Fed”.
Equity funds recorded the fourth largest weekly outflow of 2022, while bond funds saw investors pull out money for a second straight week.
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Digital Finance Analytics (DFA) Blog
Bye-Bye Pivot: Market Update 3rd September 2022 [Podcast]
Our latest Friday afternoon chat, picking over the latest charts, which are telling a confusing story, as Central Banks continue to hike into a head wind. How will this play out?
You can get Tarric’s charts here: https://avidcom.substack.com/p/charts-that-matter-2nd-september and follow him on Twitter @Avidcommentator
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Digital Finance Analytics (DFA) Blog
Blowing The House Down: With Tarric Brooker [Podcast]
This is an edited version of a live discussion about the current state of the markets with Damien Klassen, Head of Investments At Walk The World Fund and Nucleus Wealth.
Original version here: https://youtu.be/aaP7GdRicKA
Energy discussion here: https://youtu.be/4AhEaWqOpAU
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Digital Finance Analytics (DFA) Blog
DFA Live Q&A HD Replay Damien Klassen: Investing Now [Podcast]
JPMorgan holds tens of billions of dollars in gold in vaults in London, New York and Singapore. It is one of four clearing members of the London market, where global gold prices are set by buying and selling metal held in a few London vaults — including JPMorgan’s and the Bank of England’s.
JPMorgan is the biggest player among a small group of “bullion banks” that dominate the precious metals markets, and thanks to a recent US court case, and the internal documents presented by prosecutors we got a glimpse of just how dominant a role the bank has played and how the Gold market works. In 2010, for example, 40% of all transactions in the gold market were cleared by JPMorgan.
This is important because as I have said many times, the 50 times plus relationship between physical gold holdings and the various derivatives held against it means it is a highly manipulated market, which sits at the heart of the financial system.
So today we will look at the case, and how so called called “spoof” trades — large orders intended to manipulate prices that were quickly canceled works.
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Digital Finance Analytics (DFA) Blog
Man Versus Machine: A Glimpse into The Fixed World Of Gold [Podcast]
In this week’s market review, we examine the curious relationship between updated economic data, and the markets. And I conclude, Up is Down.
We start with the US markets, look across Europe and Asia, and end in Australia, as well as covering the latest in Oil and Metals, and a quick look at Crypto.
It appears equity traders have apparently gotten bored waiting for higher interest rates to make their presence known in the economy despite increasingly thorny warnings from the Federal Reserve, and the shockingly frank revelation from the Bank of England on Thursday that Recession is coming.
The focus rather has been on celebrating buoyant earnings and economic reports. The S&P 500’s performance over the last five days was virtually flat compared with the previous two weeks.
The central bank is “nowhere near” being almost done cracking down on inflation, San Francisco’s Mary Daly said. Cleveland’s Loretta Mester is looking for persuasive evidence price pressures are moderating and Chicago’s Charles Evans said policy makers were a few reports away from seeing the kind of data that would make them think they’re on the right track.
“The market is basically saying to the Fed, ‘You’re not going to have to go as far as you think you do,’ and also, ‘You might have to start reversing course much sooner than you think you have to,’” Katie Nixon, chief investment officer at Northern Trust Wealth Management, said “Is it sustainable in the face of a Fed that appears to be hell-bent on not stopping not stopping?”
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In this week’s market review in what was a chaotic week, we look at how the financial markets reacted to bad news on inflation, and rising target rates from Central Banks, and solid earnings from tech megacaps which brought some solace to traders though worries about recession risk remain.
After Thursday’s data showed the U.S. economy contracted in the second quarter, stocks rose as traders bet rates would rise more slowly. But is this rally within a bear market or the start of a new bull market. I will give you a clue – hopium is driving things not logic. But after a horrific first half, the S&P 500 had its best month since November 2020 and Nasdaq 100 had its strongest performance since April of that same year. But this could come to haunt the Federal Open Market Committee.
US financial conditions are looser than they were when Fed hiked in March. So the spike raises the question of when the rebound itself starts to work against the goal of draining bloat from the economy.
It’s an issue investors must weigh in calculating the recovery’s staying power. “Our view is that earnings for all equity classes likely will peak in 2022 and move lower as the economy weakens, revenue growth stalls and input costs remain elevated,” strategists with the Wells Fargo Investment Institute wrote in a note on Thursday.
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