Observations
Diversification has not been working well this year. With rising interest rates, bond and stock markets were both dysfunctional until June. Recently this correlation seems to have returned to a more normal situation and it’s nice to see diversification working again. If the Fed feels like we are on the brink of a recession, they might stop, slow, or pause on interest rates. There are several models that even have them needing to lower rates in response to recessionary data.
Tom noted the Fear Greed Index from CNN. People are becoming less afraid of the market and less afraid of geopolitical issues. Less afraid usually means an improvement in market performance. The current reading of 39 is much better than 1 month ago when it was 14. See the URL screen shot below.
July asset class information
· Muni bonds are up around 2.3%, yield between 5-6%. A good sign that bond market is returning to normal and less afraid of inflation. Is it worried about a recession?
· High Yield Bonds are up
· The S&P is up about 4.5%
· NASDAQ up about 9.5% since the start of July
· Aggressive Growth stocks are up over 20%
· Biotech stocks up quite a bit as well and healthcare has weathered this storm better than some sectors
· Value stocks are up about 6%
· Real estate flat, not surprising since it is interest rate sensitive
Starting to see signs that inflation is coming down, gives us the opportunity to have the Fed pause or raise rates less, which is a positive development for certain types of stocks.
What are the different types of valuations for stocks?
1. Capital Markets pricing model compared to the risk-free rate of return – is interest rate sensitive
2. Dividend pricing Model: rising income from stocks causes buyers to pay more for that stock. Related more to business decisions and durability of the dividend and less to the Fed or broader economy.
3. Cyclical stock – fuel(commodities), retail, etc.
We looked at some examples of falling prices that help us get the feel of inflation beginning to come back down.
Tom reviewed the Lumber Futures Price chart. In anticipation of the COVID shut down, some producers went into maintenance in 2020 because they weren’t prepared for normal supply, nevermind the increased demand. A huge spike is often followed by increased production. Lumber pricing begs the question about a recession or is inflation going to slow down the building projects that people are willing to renovate, remodel, etc. We need more housing.
Tom reviewed the Gold commodities price. Not necessarily a great inflation hedge, although there is a spike when there are geopolitical issues at the forefront. Gold prices are coming down. That’s hopefully a sign of the chaos or entropy in the world receding a bit.
Tom reviewed the oil chart and discussed how oil prices are a function of inventory. They rise when we don’t have a lot of it. When comparing Oil prices vs. Gasoline prices, there’s a phrase called ‘rockets and feathers’ which refers to the relationship between oil and gasoline. When oil spikes, gas goes up like a rocket. When oil falls back, gas falls like a feather. Thankfully prices are coming down, but opportunists are out there – everywhere and in large numbers.
Copper prices have fallen as a direct response to what higher mortgage rates can do to the housing market. Often thought of a signal for recession, the falling price is just another example of the inputs to inflation working in the right direction.
We continue to believe that China working through its COVID issues is a key element in where the markets go from here. As a deflation exporter to the world, and a significant source of supply chain issues, we have been keeping a close eye on China.
Bears – believe this market is a result of money supply and over speculation. Earnings will be revised lower and valuations are still too high
Bulls – use current strength in earnings and momentum to support strength and resiliency in the economy leading to higher prices when the Fed stops raising rates.
Breadth in the market is a positive sign. Yesterday 98% of the market was up and the NASDAQ and S&P 500 broke through their 50 day moving averages. These are signs that this turn up in the market may be more durable than the last two. Dead cat bounce or beginning of a new bull market? Next weeks Fed meeting could play a major role in where we go from here.
Take August off and we will resume OOH Zoom calls in September 2022.
As always if you would like to schedule a call to discuss your investments, please reach out us at 207-847-4032 x100.
All charts referenced are available with their URLs in the screen shoots below.
Be Well!
Tom
The opinions voiced are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may directly.
All investing includes risks, including fluctuating prices and loss of principal.
Economic forecasts set forth may not develop as predicted and there can be no guarantee that strategies promoted will be successful.
