(Please enjoy this updated version of my weekly commentary published September 26th, 2022 from the POWR Growth newsletter).
As usual, we will start by reviewing the past week…
Here is an hourly, 3-week chart of the S&P 500 (SPY):
Over the last week, the S&P 500 is down by a little more than 6%. The major impetus for the move lower was the FOMC where the Fed didn’t do anything unexpected, other than reiterate its hawkish message.
It seems that 75 basis points are kind of now the default until inflation starts to decisively bend lower.
And as we covered last week, August saw an acceleration in inflation by many measures. In essence. it reset the clock at zero. This means rates are going to go even higher and stay higher for longer - a lethal combination for stock prices, especially amid the backdrop of a slowing economy.
Unfortunately, the evidence keeps piling up that this is the case. Take a look at the housing market which is showing price drops in many of the hottest markets and a major decline in mortgage applications. Interestingly, the market has kinda frozen.
Many homeowners with low mortgage rates don’t want to sell, while most potential buyers are priced out due to rising prices over the last 2 years and higher mortgage rates.
Thus, we really aren’t seeing the market ‘clear’ at a new equilibrium, instead, we are seeing a freeze in activity which doesn’t bode well for economic activity.
In terms of the industrial sector, we are starting to see signs of weakness in global growth as the world economy faces the burden of higher energy prices and a strong dollar.
This creates financial stress for export-dependent countries that borrow in dollars which encompasses many countries in Asia and Africa and Latin America.
The main reason that investors pay close attention to economic data is to get an early read on the trend in earnings. So far, earnings have continued to grow, albeit at a slower rate.
More economic weakness could upend this picture and lead to a steeper drop in stock prices. Based on what we are seeing in housing and other leading indicators, this is becoming increasingly likely.
Price Targets
The combination of stubbornly high inflation and a weakening economy means this is going to cut deeper and last longer than a garden-variety bear market.
I think around a 35% to 40% drawdown (2x normal) is a reasonable target which gives us a range of 2700 to 3,000 depending on how bad the recession gets.
To be clear, so far, we haven’t seen any earnings contraction at all. I believe this is the catalyst for the S&P 500 (SPY) to break the June lows and break the 3,000 level.
What To Do Next?
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SPY shares were trading at $367.12 per share on Tuesday morning, up $2.81 (+0.77%). Year-to-date, SPY has declined -21.81%, versus a % rise in the benchmark S&P 500 index during the same period.
About the Author: Jaimini Desai
Jaimini Desai has been a financial writer and reporter for nearly a decade. His goal is to help readers identify risks and opportunities in the markets. He is the Chief Growth Strategist for StockNews.com and the editor of the POWR Growth and POWR Stocks Under $10 newsletters. Learn more about Jaimini’s background, along with links to his most recent articles.
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