The S&P 500 dipped back into bear market territory last week, but the bottom hasn’t fallen out… at least, not yet.
In last week’s livestream, we explored the fallout from the Fed announcement and looked to speculate future Fed action as the rest of the year progresses. We also examined the Fed’s updated economic projections going all the way out to 2025, which pointed to an economic slowdown. Whether that happens remains to be seen, but it’s hard to look on the bright side when investors seem to have such a negative outlook.
Pain Across the Pond
The Bank of England raised its target rate by 50 basis points (0.5%) last week. However, traders are convinced the bank will have to do it again to counteract a new tax-cut/stimulus plan created by the new prime minister’s government. Bond traders see the need for a much larger hike to stem the decline of the pound and to control inflation. This is a problem for the markets.
Basically, Liz Truss, the new PM, plans to cut taxes, which means the BOE will have to raise rates faster than anyone was planning on, and the economy could slow faster than expected. It’s a tough deal because the U.K. government will wind up fighting the BOE over trying to speed up the economy (and therefore raising inflation) and the BOE trying to fight inflation and support the pound.
On the one hand, bond traders see a huge rate hike in the short term needed to stem the pound’s decline against the dollar (which is near lows last seen since in 1985), but the BOE hasn’t announced any plans to make a change until they meet again in November.
So this leave everyone hanging in an uncomfortable position of uncertainty. Will the BOE hike rates early? If so, when and how much? As we know, traders hate uncertainty, and this will likely keep volatility in the stock and bond markets high.
If they hike rates, it should slow the U.K. economy, which creates a nasty chain reaction, likely slowing Eurozone, which slows North America, and so forth.
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Don’t Mind the Bears
The S&P 500 is at long-term support, but bearish sentiment is continuing to build. In Monday’s livestream, we examined whether there are any good stocks to buy now or if investors avoid the market completely. Before earnings start to stream in this week, we think there are some hidden reasons why new lows are unlikely and some rare good deals are available.
To take advantage of good deals – and they are out there, contrary to all the negative noise – we employ two strategies: building a watchlist of cheap stocks (Bed Bath and Beyond, Gamestop, AMC, etc., for example) with low value and buying into short-term positions; and buying value stocks when the market is low. Value stocks are mature companies with steady growth rates and stable earnings/revenue.
We’re almost always bullish on retail, and while Costco Wholesale Corp. (COST), for example, had a solid earnings report last week, its share price still dipped amid inflation fears.
In other sectors of the market, technology companies’ expected earnings have been down. Future growth has been discounted as interest rates go up. The bottom line is that expected earnings are worth less when interest rates are rising. Plus, growth experienced outside the U.S. is contending with the strength of the dollar, which further damages the value of those earnings. Tech represents a huge share of the S&P, so when tech stocks are devalued, it hurts the rest of the market.
What’s the catalyst that could turn things around? Earnings. This week, we’re looking at three key earnings reports to be released. Cintas Corp. (CTAS) is a food services provider of linens, janitorial supplies, uniforms, and more and will release earnings on Sept. 28. A negative CTAS report would reflect a downturn in the restaurant and food services industry, another casualty of inflation.
We look to Nike Inc.’s (NKE) earnings report on Sept. 29 to provide a bellwether for retail spending leading up to the crucial holiday season, and Paychex, Inc. (PAYX) on Sept. 28, a payroll solutions company that could help us get a feel for hiring and labor.
The good news – cloaked in bad news for now – is that while most are looking at this quarter’s earnings with pessimism, they did the same thing last quarter when reports turned out better than expected. We expect that trend to continue this time around.
Many of our viewer questions about where to find good deals, the S&P’s volatility, and upcoming earnings reports were answered in the livestream presentation. Here are a couple more that we covered:
- Any thoughts on where you think the 2-year and dollar will have a short- term top? – Gary F.
- In addition to earnings, are there any other reports we might look forward to? – Steve S.
If you have questions of your own, just drop a line in the comments section or email us at firstname.lastname@example.org.
John Jagerson & Wade Hansen
Editors, Trading Opportunities