Doom and Gloom

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Published June 17, 2022


Investors got what they thought they wanted this week when the Federal Reserve hiked interest rates by a full 0.75% and talked even tougher about fighting inflation. But a little post-rate hike relief rally gave way to yet another selloff the following day.

Investors have quickly shifted from worrying about inflation to fully embracing talk of a recession and downward revisions in corporate earnings. By many accounts, the recession is already here. It certainly felt gloomy and heavy in markets this week.

For a graphic display of where we have been, we chart the extraordinary rise and fall of the poster child of the post-Covid boom/bust cycle – the ARK Innovation ETF. The ETF blasted upward almost five-fold before crashing back downward, this week hitting the low point of the Covid Crash. That’s a FULL ROUND TRIP; a truly stunning reversal of fortune! Of course, the ETF is many times the size it was back pre-Covid having made its manager, Cathie Wood, famous in financial circles (and much richer).

ARK Innovation ETF full round trip

The broad market S&P 500 has held up much better, holding on to at least some of its post-Covid Crash gains (for now). Falling 10 of the last 11 weeks has been a brutal grind for investor psyches. The chart below reminds us of the Wall Street adage: stocks take the stairs up … and the elevator down.

S&P 500 holding on to at least some of its post-Covid Crash gains (for now)

Much of this decline has been the unwinding of excessive optimism focused on a handful of stocks (the FANGMA group) during 2021. The chart below shows that we are just now reaching an oversold condition in the S&P 500. The orange arrows tell us that touching this lower threshold of “oversold” has been the launching point for a market recovery over the past decade. HOWEVER, on the left-hand side of the chart we put black boxes around the last two true bear markets (dot.com crash of 2000-2002 and financial crisis of 2008). In both of those bear markets, stocks remained in oversold territory for an extended period. We would expect such a situation this time around unless something soon sparks a dramatic change of heart in stocks.

Oversold condition during bear markets

The market’s gloom and doom has been going on for months now, with the major indexes, held up by the FANGMA stocks, late to get fully hit. Stock demons have morphed from Covid lockdowns and supply shocks to war in Ukraine to rapid inflation to, now, recession and falling corporate earnings. There have been very, very few places for investors to go as bonds suffer their worst selloff perhaps EVER. Nevertheless, we can envision all of this settling down later this year as rates level off at some point, supply disruptions ease, and stocks (maybe?) start to appear cheap to investors.

Market events follow up


Market Update

Stocks opened the week with a sharp slide as investors continued their negative reaction to the prior Friday’s disappointing inflation report. Over the weekend, cryptocurrencies were slammed when one of the major trading exchanges halted transactions, a further example of market turmoil. The S&P 500 lost -3.9% Monday to bring its 3-day slide to -10%. Tuesday saw yields continuing to climb as investors believe the Fed will have to be more aggressive in raising rates in order to slow inflation. Stocks slowed their descent losing -0.4% in Tuesday’s trade. Wednesday delivered the long-awaited Fed meeting and a +0.75% interest rate hike. Investors cheered the larger rate move with stocks rising +1.5%. But they thought better of it the following day. Thursday found shares slammed again with stocks hurtling downward -3.3% as investors shifted toward worrying about a coming recession and the prospect of dipping corporate earnings. Stocks stabilized a bit Friday with the broad market relatively unchanged on the day. However, the favored energy sector got hammered with oil prices falling -5% perhaps on recessionary fears hitting demand expectations; or investors pulling money out of the only profitable sector left standing.

Another brutal week for stock investors saw the S&P 500 (SPY) delivering its 10th losing week in the past 11, gapping down to open the week and falling further from there. The broad market index closed the week down -5.74%. The Nasdaq 100 (QQQ) slid -4.90% while smallcap stocks (IWM) stopped their fall at pre-pandemic levels, off -7.51% for the week.

Warm wishes and until next week.