Market Overview
On Monday, October 10th, the S&P 500 slipped -0.75% to 3,612.39. JP Morgan Chase CEO Jamie Dimon stated his believe that the U.S. is likely to reach a recession in six to nine months from now. From CNBC – “Dimon cited the impact of runaway inflation, interest rates going up more than expected, the unknown effects of quantitative tightening and Russia’s war in Ukraine.”
In an open letter to the Fed, CEO and CIO of Ark Invest Cathie Wood stated that, “Upstream price deflation… is likely to turn into downstream deflation” and expressed concerns over her view that the Fed’s decision-making hinges on employment and headline inflation, which are lagging indicators. Upstream prices are prices of the initial production inputs for manufacturing, whereas downstream are the retail prices paid by consumers.
Wood emphasized that commodity prices are upstream and leading indicators. In her analysis, “Most commodity prices have peaked” and that she believes the Fed should not be “fighting and exacerbating the global pain associated with a supply shock to agriculture and energy commodities caused by Russia’s invasion of Ukraine.” Data was provided below.
Her analysis on downstream inventory accumulation is supported by Nike’s sales growth of only 3.6% while inventories increased 44.2% globally.
Indexed to March 1st, 2020, and using the S&P 500 Index (^GSPC) as a proxy for equities, Barclays Bank iPath Bloomberg Commodity Index Total Return ETN (DJP) as a proxy for commodities, and the iShares 20 Plus Year Treasury Bond ETF (TLT) as a proxy for bonds – peaks reached are highlighted in yellow. This appears to align with the later stages of the Slowdown Phase of the Intermarket Business Cycle (highlighted in red). Under this assumption, the equity market downturn would appear to continue.
Indicators to Watch
Percent of Stocks Above 50-Day Average vs. SPDR S&P 500 (SPY). Currently, the Percent of Stocks Above 50-Day Average is 16.86%. This average breached 5% for the 2008 financial crisis and Covid-19 recession.
Manheim Used Vehicle Value Index. From Manheim – “Wholesale used-vehicle prices (on a mix, mileage, and seasonally adjusted basis) decreased 3.0% in September from August.” Supply chain disruptions contributed to previous price hikes of automobiles. This precipitous decline may be attributed to supply chain improvements or could be interpreted as a moderation in demand – a goal of the Fed.
Below is a non-exhaustive list of key variables affecting the U.S. Stock Market.
Inflation (Ongoing). As previously stated in an edition, a driving force of inflation is “excessive growth in the supply of money – Federal Reserve policies.” Inflation is combated by increasing interest rates, increasing reserve requirements and a call in debts owed or increase interest that bonds pay (Investopedia). Below is a graph provided by Trading Economics of the U.S. annual inflation rate.
Russian invasion of Ukraine (Ongoing). Russia is the world’s top exporter of fertilizers. Below is an indexed analysis of CF Industries (NYSE: CF), a leading U.S.-based publicly traded fertilizer producer, S&P 500 Index and Nasdaq Composite since Russia’s invasion of Ukraine on February 24, 2022. CF has appreciated 41%, in comparison to S&P 500 (-15%) and Nasdaq (-19%). Currently, the U.S. has not imposed any sanctions on Russian fertilizer. However, I view CF’s volatility as a leading indicator of the impact of Russia’s invasion of Ukraine.
Additionally, prior to invasion of Ukraine, Russia provided 40% of natural gas consumed in the European Union. After sanctions were placed in July 2022, Russia ceased the flow of gas into Western Europe. Since cessation, Norway has become the top supplier of natural gas for the European Union. Oddly enough, Equinor ASA (NYSE: EQNR), a Norwegian state-owned energy producer, trades very similarly to CF Industries – using February 24, 2022, as an index date.
2022 Midterm Election Cycle (November 8, 2022). The impact of legislation and executive orders to the market is best exemplified by Tilray’s (Cannabis company) price action on Thursday, October 6th. TLRY’s price appreciated over 30% in about one hour after Biden’s 3pm ET tweet announcing executive action to pardon simple marijuana possessions under federal law.
Industries that may be principally impacted by this election cycle include health care, oil & natural gas, renewable energy, Cannabis and infrastructure.
Week Ahead
Yesterday (10/10/2022), on CNBC’s Squawk on the Street, Chicago Federal Reserve President Charles Evans stated that, “Ultimately, inflation is the most important thing to get under control. That’s job-one… price stability sets the stage for stronger growth in the future.” Price stability is the goal of the Federal Reserve and is achieved when inflation is low and stable. Hyperinflationary markets ultimately result in the replacement of a nation’s currency, which happened to Germany’s Weimar Republic after WWI reparations for the Allied powers (from the 1919 Treaty of Versailles) in the 1920s and Zimbabwe in the late 2000s after political and economic mismanagement. Thus, the immediate economic welfare of individuals is superseded by a central bank’s focus on combating inflation.
Price stability yields sustainable economic growth. Price stability is measured by the Consumer (inflation indicator) and Producer Price Indexes. Both indexes are lagging economic indicators – indicators that reflect past conditions.
Consumer Price Index (CPI) – The Consumer Price Index data for September 2022 will be released on Thursday, October 13, 2022, at 8:30am ET. The following graph is provided by Investing.com and presents the CPI YoY. An actual reading lower than forecasted is a positive catalyst for the equities market – as exhibited by August 10th 20 basis point miss (the S&P 500 Index rose 2.12% on August 10th).
Producer Price Index (PPI) – The Producer Price Index data for September 2022 will be released on Wednesday, October 12, 2022, at 8:30am ET. The PPI is different from the CPI – the PPI measures the change in the price of goods sold by manufacturers whereas the CPI measures change in price from the perspective of the consumer (Investing.com). Lower than forecasted figures is a positive catalyst for the stock market.
Sources
https://ark-invest.com/articles/market-commentary/open-letter-to-the-fed/
https://publish.manheim.com/en/services/consulting/used-vehicle-value-index.html
https://www.cnbc.com/2022/10/10/jpmorgan-jamie-dimon-warns-us-likely-to-tip-into-recession-soon.html
Disclaimer
This newsletter was written to provide investor information and education and should not be construed as a guarantee or investment advice.