Weekly Update

Stocks Stuck in a Holding Pattern

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Published September 9, 2022

As stocks continue wrestling with many competing narratives, here is Delta’s summary of where things stand.

“The re-re-re-adjustment of interest rate expectations higher following Fed Chairman Powell’s Jackson Hole speech two weeks ago triggered a significant selloff in stocks. Then the news deteriorated further.
Russia announced it is shutting down of the Nord Stream 1 pipeline (supplies Western Europe with natural gas) for an extended period. This is causing a significant energy crisis in Europe. Utilities are going bankrupt and government bailouts have begun. In the UK alone, the government bailout package will cost taxpayers $172 billion. The energy shortage creates a material problem for economic growth in Europe.

Outside of Europe, China extended the Covid lockdowns of Chengdu, and Guiyang, the capital of Guizhou province. Around the world, foreign currencies continue to lose value relative to the dollar. The Japanese yen is now at a 24-year low relative to the dollar and the euro is at a 20-year low. The China lockdowns and strong dollar are a drag on the earnings prospects for U.S. multinational companies.

With the sell-off in stocks, many indicators moved to the brink of bearishness. But the stock market is showing some resilience. Bulls believe inflation is fading, the Fed will pivot to a more dovish interest rate policy and China will reopen which will boost global growth. Combined with very low investor positioning and historically high levels of negative investor sentiment, the market could have a strong rally into the end of the year.

Historically, commodity prices and inflation have had high positive correlation. Below is a chart showing the collapse of commodity prices.

Collapse of commodity prices

Fundamentally, the economy may be holding up well because consumers are in very good financial shape.

Consumer balance sheets are as strong as they have been in the past forty years

The chart above makes clear that consumer balance sheets are as strong (low debt relative to total wealth) as they have been in the past forty years.

The signals investors are receiving today are mixed. The high volatility of the market reflects high uncertainty.”

As any of our subscribers knows, this year has been a flurry of signals as the market has gyrated furiously. With each passing day, we get closer to a more defined and long-lasting trend.

Market Update

Coming back from a Labor Day holiday stocks found markets challenged by Russia’s announcement they would halt natural gas flows to Europe. Mixed economic reports did little to ease the negative mood that lingered from Fed Chair Powell’s blunt inflation-fighting tone of a few days ago. Stocks slipped -0.4% Tuesday. But that was it for the bears this week. Investors put the negative feelings aside through the remainder of the week. In what seemed to be a reaction to overwhelming negative sentiment and clear technical support levels, buyers swooped in for what may or may not be a short-term trade. Wednesday saw a broad-based +1.8% rally followed Thursday by a +0.7% lift. This came despite the European Central Bank hiking interest rates by 0.75%, while a number of Fed governors seemed to hint that a similar hike is coming for U.S. rates. This exact sentiment caused stocks to sell off only a few trading days ago. However, Friday delivered a third straight day of gains this time rising +1.5% as investors appeared to take some comfort from resilient company earnings announcements.

Stocks bent but, at least this week, did not break with the S&P 500 posting a +3.66% gain for the holiday-shortened week. The Nasdaq 100 (QQQ) shot higher by +4.04%. Smallcaps added +4.06%. All three indexes recovered the prior week’s declines.

Warm wishes and until next week.