Good Friday evening to all of you here on r/stocks! I hope everyone on this sub made out pretty nicely in the market this past week, and are ready for the new trading week ahead. 🙂
Here is everything you need to know to get you ready for the trading week beginning August 29th, 2022.
Stocks plummeted Friday after Federal Reserve Chair Jerome Powell said in his Jackson Hole speech the central bank won’t back off in its fight against rapid inflation.
The Dow Jones Industrial Average dropped 1,008.38 points, or 3.03%, to 32,283.40, with losses accelerating into the close. The S&P 500 fell 3.37% to 4,057.66, and the Nasdaq Composite slid 3.94% to 12,141.71.
The major averages declined for a second week. The Dow tumbled 4.2%. The S&P 500 and Nasdaq Composite lost roughly 4% and 4.4%, respectively.
Powell reiterated a tough stance against inflation, spurring investors to weigh the implications of higher interest rates kept in place for a longer time.
“Restoring price stability will likely require maintaining a restrictive policy stance for some time. The historical record cautions strongly against prematurely loosening policy,” Powell said.
“We do believe the Fed,” said Zach Hill, head of portfolio management at Horizon Investments. “We believe what they say that rates are going to be higher for longer and we’ve seen some repricing of the cuts in 2023. We think there’s more to go on that front and it’s likely to continue to fuel equity volatility from here.”
The sell-off on Wall Street was broad-based, with just five stocks in the S&P 500 posting gains on Friday.
This past week saw the following moves in the S&P:
S&P Sectors for this past week:
Major Indices for this past week:
Major Futures Markets as of Friday’s close:
Economic Calendar for the Week Ahead:
Percentage Changes for the Major Indices, WTD, MTD, QTD, YTD as of Friday’s close:
S&P Sectors for the Past Week:
Major Indices Pullback/Correction Levels as of Friday’s close:
Major Indices Rally Levels as of Friday’s close:
Most Anticipated Earnings Releases for this week:
(CLICK HERE FOR THE CHART!)
(T.B.A. THIS WEEKEND.)
Here are the upcoming IPO’s for this week:
Friday’s Stock Analyst Upgrades & Downgrades:
2022 Slams Stocks and Bonds
It is no secret that 2022 has not exactly been the year of the 60/40 portfolio. This year has left nothing safe with both stocks and bonds hit hard. Both are in the red by 10%+ on a year to date basis headed into the final week of August. In the charts below, we show the year to date total returns of the S&P 500 (y-axis) and the year to date total returns of various ICE Bank of America bond indices (x-axis) through August for each year going back to their respective inceptions (each index began in 1973 except for high yield which began in 1987). No matter which way you cut it, 2022 has been the worst year of the past half century for stocks and bonds combined.
With the S&P 500 down a little over 12% YTD, aggregate bonds (government and corporate bonds combined) are only around one percentage point better. For the comparable time of the year, the only years that also have seen both bonds and stocks sitting on a loss through August were 1973, 1974, and 1981. The same applies for government bonds. The corporate investment grade bond index has a bit more variety of years with stocks and bonds falling in 1974, 1981, 2008, and 2015. Again though, none of those other years have seen as sharp of a decline as 2022, and the S&P 500’s drop in the same time also ranks as one of the worst. 2022 is the only year that the high yield bond index has fallen simultaneously with stocks, however as we noted earlier, it does not have as long of a history as those other categories.
Democrats Expected to Keep Senate Control
President Joe Biden currently has the worst pre-mid-term approval rating since President Truman in 1950. A multitude of factors, including inflation, the botched withdrawal from Afghanistan, weakening economic data, age, and a lack of definitive action on campaign promises have all contributed to the President’s unpopularity. Although Americans are generally dissatisfied with the President, betting markets still project a nearly two-thirds chance that Democrats retain control of the Senate (chart below from electionbettingodds.com). The only two previous Presidents that saw approval ratings lower than Biden’s heading into mid-terms (since the start of WWII), Roosevelt in 1942 (third term) and Truman (first term) in 1946, ended up in the mid-terms losing twelve and five senate seats, respectively. In fact, only five Presidents have seen their party’s position in the Senate improve or remain flat since the start of WWII in a mid-term election cycle. In these five cycles, the sitting President averaged an approval rating of 57.2%, which is 19.2 percentage points higher than that of Biden.
Although only 20% of Presidential terms since the start of WWII have seen their party gain Senate seats during mid-terms, subsequent sessions of congress following these election cycles passed some significant legislation. The 88th Congress (under the Kennedy/Johnson administration) passed the Civil Rights Act of 1964, which prohibited discrimination on the basis of race, sex, religion, ethnicity, or national origin. In addition, that session of congress banned the discrimination of pay in regards to sex, and the 24th amendment was passed (which banned states from making the right to vote in federal elections conditional). The 92nd Congress (under Nixon) removed the dollar from the gold standard and established Title IX. The 116th Congress under Trump passed the CARES act, which helped the country recover from the pandemic and funded vaccination initiatives.
Regarding equity market returns, in the five mid-terms where the sitting President’s party gained Senate seats in a mid-term election year, the S&P 500 has averaged a gain of 3.1% between the election date and year-end, posting gains three out of five times. Click here to start a two-week trial to Bespoke Premium and receive our paid content in real-time.
The table below summarizes every mid-term election year since the US entered WWII, For each cycle, we show the number of seats gained or lost by the President’s party, the S&P 500’s YTD performance as well as the YTD change in the 10-year US Treasury yield. In terms of economic data, we also included a look at the y/y change in CPI and the Unemployment Rate (through September), and then finally Gallup’s Presidential Approval Rating. Although one might assume that a strong stock market boosts the President’s party in the Senate for the mid-terms, the equity market was down on a YTD basis heading into mid-terms in three of the five years highlighted above. However, the average y/y change in CPI was just 2.7% and only above 5% once. For the sake of comparison, y/y headline CPI as of the end of July currently stands at 8.5%. In terms of approval ratings, every other President who saw a gain in Senate seats in a mid-term election year had the approval of a majority of Americans, whereas nearly two-thirds of Americans currently disapprove of the President. Given this backdrop, the possibility of Democrats keeping their effective majority in the Senate would seem unlikely, but with less than three months until Election Day, the betting markets say otherwise.
Dividend Breakout Despite Declines
In last Thursday’s Chart of the Day, we highlighted how important dividends are for long-term investment performance. While dividends do help to boost investment returns over the long term, in the short term there is often an ebb and flow of dividend-focused ETFs under and outperforming in terms of price moves. For example, up until June, the S&P 500’s highest yielders measured by the SPDR S&P 500 High Dividend Yield ETF (SPYD) had mostly been trading in the green whereas the S&P 500 (SPY) was deep in the red.
With equities broadly taking a turn lower over the past week, SPYD has held up relatively well when compared to the S&P 500 (SPY). Even though SPYD has not avoided declines (as we also showed in our decile analysis, the highest dividend payers have only slightly better performance than non-dividend payers), the relative strength line of SPYD versus SPY has broken out of the past couple of months’ downtrend. That being said, it has not been a sharp move higher like what was observed in the first half of the year, particularly in the second quarter. In other words, the highest yielders are back to outperforming the broader market but not to the same extent as earlier in the year.
Two Month Rally Rotation
Using the Russell 3,000 as a benchmark, US equities peaked exactly a week ago and have traded lower in all but one session since. In all, the Russell 3000 has fallen 4.33% in that time on weak breadth, albeit certain stocks have been hit far harder than others. Breaking the index down into deciles ranked by a variety of factors, performance has generally been the reverse of what we highlighted earlier this month in regards to the rally off of the June 16th low.
Over the past week, stocks with higher multiples and smaller market caps have fallen the most. Those are also the ones that had become the most elevated above their moving averages after outperforming during the two-month rally from mid-June to mid-August. Conversely, those stocks with more attractive valuations have tended to perform better, although, here too there have been low single-digit percentage declines across deciles. One other interesting point worth noting is how the highest dividend payers have been hit just as hard as other deciles for that category which is a big difference when compared to the spring when the highest dividend payers were the only pocket of positive performance.
One Big Clue The Lows For The Year Could Be In
Are we having fun yet? The rollercoaster ride of 2022 continues, as the furious rally off the June 16 lows has taken a breather, with the S&P 500 Index finding resistance right at its 200-day moving average, a logical place for a break after a big bounce. Worries over a hawkish turn from the Fed at the Jackson Hole Symposium later this week, housing suggesting the economy is falling quicker than expected, the war in Eastern Europe, and stubborn inflation have all been listed as reasons for the recent weakness. But after a 17.4% rally off the lows, maybe it was just time for a break.
We aren’t surprised stocks have to take a breather after the bounce since mid-June, but we continue to think that stocks have likely made their low for the year, and higher prices before year-end are quite possible. In fact, we discussed two reasons we feel this way in Two Reasons the Bulls Should Be Smiling.
Will it be easy? Probably not (It never is). One of the bigger near-term worries is simply the calendar. Historically, August and September are two of the weakest months of the year. Buckle up, as we could see some usual seasonal volatility once again, but the good news is later in the year stocks tend to do well, something we anticipate to play out again.
Now for some good news! The S&P 500 made up more than half of the bear market losses, something that indeed should have bulls smiling. As we show below, since 1950, stocks have never gone on to make new lows after this happened. Now, this doesn’t mean they will go straight up from here, but the past 15 bear markets never moved back to new lows once this feat took place. Even more incredible is the S&P 500 was never lower a year later either, up 19.3% on average.
So there you have it, yet another clue that June 16 was likely the lows, and stocks potentially could be a good deal higher this time next year. The Carson Investment Research team continues to overweight stocks here, anticipating continued strength.
Sentiment Slide*
With the S&P 500 pivoting lower in the past week, sentiment has reflected the move as the AAII sentiment survey showed bullish sentiment drop from 33.3% last week down to 27.7%. That marked the first time bullish sentiment fell in three weeks, and it was the largest single-week decline since an eleven percentage point drop the week of June 9th.
Bearish sentiment picked up the bulk of that decline as the reading topped 40% for the first time since the last week of July. At 42.4%, it is at the highest level since July 14th. Although that marks a shift toward more pessimistic sentiment, reversing a trend of improvement from the past few weeks, the current reading on bearish sentiment is well below the highs from throughout the spring and early summer.
Nonetheless, after coming within only a few points of a positive reading in the past month, the bull-bear spread took a sharp turn lower as a result of this week’s results. The spread fell to -14.7 which is the lowest reading since July 14th. That was also the first double-digit week-over-week drop in the reading since June. Additionally, with a move deeper into negative territory, the spread is a week away from becoming tied for the second-longest streak of negative readings on record.
Here are the most notable companies reporting earnings in this upcoming trading week ahead-
(CLICK HERE FOR NEXT WEEK’S MOST NOTABLE EARNINGS RELEASES!)
(T.B.A. THIS WEEKEND.)
(CLICK HERE FOR NEXT WEEK’S HIGHEST VOLATILITY EARNINGS RELEASES!
(T.B.A. THIS WEEKEND.)
(CLICK HERE FOR MONDAY’S PRE-MARKET NOTABLE EARNINGS RELEASES!)
(N/A.)
Below are some of the notable companies coming out with earnings releases this upcoming trading week ahead which includes the date/time of release & consensus estimates courtesy of Earnings Whispers:
Monday 8.29.22 Before Market Open:
Monday 8.29.22 After Market Close:
Tuesday 8.30.22 Before Market Open:
Tuesday 8.30.22 After Market Close:
Wednesday 8.31.22 Before Market Open:
Wednesday 8.31.22 After Market Close:
Thursday 9.1.22 Before Market Open:
Thursday 9.1.22 After Market Close:
Friday 9.2.22 Before Market Open:
(CLICK HERE FOR FRIDAY’S PRE-MARKET EARNINGS TIME & ESTIMATES!)
(NONE.)
Friday 9.2.22 After Market Close:
(CLICK HERE FOR FRIDAY’S AFTER-MARKET EARNINGS TIME & ESTIMATES!)
(NONE.)
(T.B.A. THIS WEEKEND.)
(T.B.A. THIS WEEKEND.) (T.B.A. THIS WEEKEND.).
DISCUSS!
What are you all watching for in this upcoming trading week?
I hope you all have a wonderful weekend and a great trading week ahead r/stocks. 🙂
