June Rewind
Maybe the motto of this market should be, “Stay Away from Thursdays?” By the end of June, the S&P 500 lost 907 points, with -536 points or 59.15% of the S&P point loss occurring on Thursdays. As we saw at the beginning of February, April, and May of this year, a big Thursday down move in the market was followed by consecutive weak days, thwarting any opportunity for the market to break out of its current malaise.
The May CPI (Consumer Price Index) data, which was released on Thursday, June 9th, quickly reversed the 6% gain in the S&P 500 seen over the previous two weeks and threw the market into a massive one-week tailspin. Over the subsequent six sessions, the S&P 500 dropped by almost 450 points before rebounding slightly over the last two weeks of the month.
While additional news contributed to the drop in the market after the CPI release, it’s another example of how the Fed’s decisions continue to affect markets in a much larger way this year. With the Fed having to play catch up with inflation by accelerating their restrictive monetary policies, the market often views good news as bad news and bad news as horrible news. Such was the case with the CPI data, which was mainly in line, and then surprise rate hikes by Switzerland and Argentina caused the market to post one of its worst weeks since the 2020 Covid market. This is a clear example of how the lack of market liquidity can produce exaggerated moves when even expected news hits the market.
Thankfully the markets as a whole were able to bounce off their mid-month lows and gain back a few percentage points before closing out the month. If there is one positive from the June market, it’s that the 10-year Treasury Yield could not reach the 3.48% high it produced on June 14th. From this peak, the 10-year yield closed the month out below 3.00%, finally offering some relief to the overall market and also reducing fears of further runaway inflation.
The Forgetful First Half of 2022
The first half of 2022 will go down as one of the worst first halves of any market year on record. The equity markets posted their worst first half in over 50 years, while the bond market is an entirely different story. Deutsche Bank published a report last week stating the US Treasury market had its worst first half since 1788. Interesting historical reference, especially from a German bank; whether true or not, we know that the bond market has been even more problematic than the equity markets. It has certainly been a year of new records. But then again, what else should be expected? It’s a midterm year.
It’s hard to believe that the S&P made a new all-time high on January 4th, the day before the Fed released their December minutes, which signaled a 180-degree change in their outlook of tapering, rate hikes, and inflation. Since the January 5th Fed minutes, the market has been fighting an uphill battle regarding overall liquidity. The tapering of the Fed’s quantitative easing was accelerated and completed by mid-March. Expected slow rate increases turned into three rate hikes that pushed the Fed Rate up to 1.75% from 0.25% at the beginning of the year. And to top off the Fed’s move to reign in liquidity (aka fight inflation), they have begun to run off their Treasury’s balance sheet as of June, a move that has come a year earlier than expected.
The Russia/Ukraine issues and inflation can be viewed as impacting the overall market; however, these issues have been magnified by the inability of the Fed to properly balance the economy. As we know, the Fed is comprised of smart people who are traditionally late in their actions.
As troubling as the first half of 2022 was and as bleak as it may appear moving forward, we must remember this is a midterm year. Since 1962, the S&P 500 corrected by 19% on average during midterm years. While 2022 seems like the market has collapsed by 100%, we are well within the range of a traditional midterm correction. We understand it is difficult to remain positive during challenging times. Still, historical data shows that the months following a midterm year correction have consistently proven to be the best period for the overall market. Perhaps this time is different?
July Market Outlook
The script of a midterm year tends to make history irrelevant, leaving us to try once again to pin down a moving target regarding the current market. Usually, we would be excited heading into July as it has been the second strongest month for the market over the last 15 years; however, we all remember the market action in April, which has historically been the strongest month for the market and failed to deliver this year.
At the beginning of June, I noted that two of our most important internal indicators, S&P Money Flow and Bond market liquidity, had been showing much improvement. The Money Flows remain very positive (meaning money is still flowing towards stocks at a very healthy level) and are almost at a historical divergence from the actual price action of the market. As challenging as the last few months have been, Money Flows remain well above the January lows. We believe that the divergence in money flow will eventually matter and lead stock prices higher as they always do.
July 27th is the next Fed meeting, and we expect they will raise rates another 0.75 bps and signal an expected 0.50 bps point hike at their September meeting.
While the Consumer Price Index (CPI) data has remained very sticky month-over-month, the June CPI data was the leading cause for the June swoon. And as we discussed last month, the Fed’s preferred Personal Consumption Expenditures (PCE) continues to improve on the inflation front. For the third month in a row, Core PCE inflation data declined and continues to show lower inflation ahead. PCE gives us a clearer picture of overall inflation, just not energy and house, as CPI does. Considering the PCE data and many other economic readings that are rolling over at this time, we expect the Fed to pause rate increases at the September meeting.
Last month we mentioned that it seemed like there was some upside risk to the market for the first time all year. The overreaction to the May CPI data didn’t allow this to manifest in the market’s price action, but we continue to see improvement throughout many market areas. One significant development during June is the lack of volume in the market when the S&P 500 sold off roughly 9.5% over a five-day period. The selloff was done on roughly half the expected volume of similar market moves. This lack of volume, especially during such a dramatic drawdown, is a clear sign that most investors that have wanted out of this market have already sold out, another positive market divergence.
Considering all our data and traditional midterm year patterns, we feel confident that a primary bottom for this market will likely occur over the next week or so. Specifically, we would look around July 12th as the optimal date for the low, which could lead to a significant bounce within the overall market. A welcomed decrease in inflation pressures and less hawkish commentary out of the Fed later in July should supply the necessary fuel to drive the market higher well into August. A bold call indeed, but one we are willing to make.
We will continue to provide more data on our thoughts directly to our clients in private research reports. If you are not a Ranch Capital client and would like to be added to our research list, please email us at clientservice@ranchcap.com.