I’m never wrong just early!!! Famous last words of every portfolio manager. Inflation numbers came in below expectations this week, first time in this inflation cycle. It’s being taken by the market that peak inflation numbers may be in. This will allow the Fed not to have to publicly telegraph unlimited rate hikes into the future.
Rate hikes are a handicap on the economy. Higher rates equate to higher borrowing cost meaning less profits for companies. This trickles down to employees (through a lack of wage growth or hiring growth) and shareholders through lower amounts of return. I wrote you an article a while back stating rampant inflation is bad, but deflation is worse. We are always looking for that goldilocks economy. Not too hot, not too cold, but juuuuust right. It’s a constant balancing act, that’s impossible to get right, but that won’t stop them from trying. Ever since they allowed the heads of the respective Federal Banks to speak publicly, it’s created volatility in equity markets.
I’m of the belief that the low is in, but it would not surprise me to get another 5-10% swift pullback. There’s a great chart I follow, providing a good long-term indicator of longer-term highs. It’s the percentage of companies inside the S&P 500 making 4-week highs, (following significant drawdowns.)
As you can see for the chart, we recently went past the 55% barrier, which has proven to be a significant number in the previous bear markets. Although no one has “the crystal ball”, we all still look for evidence to support our predictions. I mean with all the charts and indexes, surely by now we have perfected an algorithm that will tell us the answer to all of these market untold stories. Nah, sorry. That would be no fun, and probably put a lot of people out of work. The market is the great humiliator, always dispelling any one theory that has been placed upon it. Although some data points have better odds than others.
Taking the 4-week high (after a designated bear market) has a really high percentage of accuracy. When I looked through the past 10 pullbacks of 20% or more, it was only the financial crisis that showed over 55% of companies in the S&P 500 making 5-week highs, and we continued to make lower lows. At that stage though we were having bankruptcies. Well, we just went through 55% in early August.
It doesn’t mean that the market won’t go down from here, just that the low of this current set of problems that caused the bear market we are in. The market being the ultimate pre-pricer of all commonly known things, has already digested our current set of issues we are working through and put a price tag on that. So, I read this chart as saying, unless something hits us that we don’t even know exists yet, I would expect the market to have an upward bias and make all-time highs again, before it would make a low that is lower than what we set in June.
This does not mean, ALL ABOARD. It will still move around, but I’m saying any pullbacks can be purchased from here, particularly in the asset classes that have underperformed in this bear market.
OK that’s it, short and sweet this week, as I get back on the road going to visit clients.
With that here’s the buy/sell.
Mick Graham, CPM®, AIF®
Branch Manager Raymond James
Financial Advisor Melbourne, FL