Weekly Update

What Will Get the Bulls Really Running

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Published November 18, 2022


The folks at Delta have provided a good succinct overview of the state of the stock market and what needs to happen for a sustainable uptrend to occur. Here’s what they have to say:

“Since mid-October, the Bull has shown some life. The S&P 500 is up by about 5% from the closing low on October 12. Bullish drivers of the market include:

  • An expectation for typical seasonal strength in November and December
  • A perfect history of 18 – 0 of positive S&P 500 performance from November through April in mid-term elections years dating back to 1950
  • Mid-term elections that deliver a divided U.S. Congress which is expected to reduce the likelihood of any new taxes and major fiscal expenditures
  • Earnings reports are not as bad as feared
  • Maybe the Fed will stop raising rates sooner rather than later

The Bull’s charge is being slowed by two major factors. First, the Fed is showing no inclination for pulling back on its rate hike agenda. Last week, Fed Chairman Powell: “…we want to be sure that we don’t make the mistake of not tightening enough or loosening policy too soon.” He added that inflation and other data since September “suggest that the ultimate level of interest rates will be higher than previously expected.

Since August 2, the terminal Fed Funds rate expectation has climbed from about 3.4% to 5.1%.

Rising expectations for terminal Fed funds rate

Higher interest rates weigh on stock valuations (often translate to lower P/E multiples) and will likely further slow economic growth.

The second obstacle to the end-of-year bull charge is analysts are lowering their S&P 500 earnings estimates for the fourth quarter of 2022 and the full year 2023. In July, analysts estimated fourth quarter earnings to grow nearly 9%. At the end of the third quarter (September 30), analysts had cut earnings growth to 4%. Today, consensus estimates have been slashed further to -1%.

Expectations for Q4 2022 earnings growth rate Y/Y

The consensus analyst estimate for 2023 S&P 500 earnings is $233.36 (+6% from 2022e of $221.60). But, the Bears have estimates much lower. Their range is from $170 to $220 for 2023.

For the Bull to find solid footing and offer a sustained advance, the market will have to believe that it has truly found the peak in interest rates (the terminal rate) and earnings have found a bottom. Once it is evident that these two factors have been determined, the Bull will be free to roam.”


Market Update

After the prior week’s crazy ups and downs, stock investors stepped back this week to consider the recent change in assumptions. Are the recent milder inflation reports enough to get the Fed to slow down rate hikes? Have corporate earnings been good enough to assuage investor recession fears? Will post-election government gridlock deliver a market rally as it has in the past? Monday brought a -0.9% dip after last week’s powerful advance. Tuesday’s producer price report supported the declining inflation narrative leading stocks to fully recover the Monday dip. News out of China of relaxed Covid restrictions and help for its ailing property market further supported stocks. Walmart reported solid earnings sending that retail heavyweight smartly higher. A broad retail report Wednesday also displayed strong retail sales while Target and Lowes offered mixed messages on the strength of consumers. Stocks dipped -0.8% in Wednesday’s session. A further -0.3% dip Thursday as oil prices slid on concerns about the strength of global demand. Friday brought flat trading while oil prices continued their slide. Stock indexes did not find enough enthusiasm to vault past resistance at 4000 for the S&P 500.

After the prior’s week powerful advance stocks help up well with the S&P 500 (SPY) logging a slender -0.62% dip. The Nasdaq 100 (QQQ) fell back -1.09%. Smallcap stocks (IWM) slipped -1.70%.

Warm wishes and until next week.