I don’t know about you, but the long 3-day weekend surrounding Labor Day makes me stop and enjoy that last bit of Summer. That pause is important to help take a deep breath and appreciate the memories and laughs that were shared while enjoying the warmer days that made everything just feel better.
Quick Snapple cap fact for you before we dive in! The team “Dog Days” historically has been a time when many market participants are gone on family vacations or at least their professional attentions are not as focused as normal as kids are out of school and needing additional monitoring.
Along with Labor Day coming to an end, it is also a time of greater seriousness in the markets as we are getting closer and closer to Mid-Term elections and year-end forecasting by many larger companies as they round out the last quarter of the calendar year and prepare for 2023. The need to find a cause for market moves, the need to pin the tail on why the markets are doing what they are doing continues. Friday was a tough day, yet it preceded a holiday weekend and the last holiday weekend of summer at that. I believe that although the US markets are clearly still on the defensive, we are still the best place to be compared to Europe. Might I also add that the US Dollar is continuing to move to new highs vs. other foreign currencies on an almost weekly basis.
On one hand, the US Dollar strength is a statement about the stability of our domestic economy, yet on the other hand, it is making our exports increasingly more difficult due to higher costs of US goods and services on an exchange rate basis. In looking at broad asset classes:
- Rising interest rates have an adverse effect on fixed income of all types.
- Rising energy prices and continued slowdowns in economic activity are negative for foreign companies across the globe.
- Commodity prices continue to rise after pulling back from the huge run up at the beginning of the year.
- Cash seems to be the only non-volatile asset class during times of market turmoil.
- US Stocks seem to be the cleanest asset class with 99% of the S&P 500 companies having reported Q2 earnings. Earnings up 7.3% year over year, revenues us 13.7% year over year, and 75% having reported earnings that exceeded estimates.
Unpredictable price movements are part of long-term investing, which is distinct from the concept of risk. We do not enjoy volatility, but we accept it is part of the game of owning great companies for the long haul. To invest for the long-term is to accept that the market will occasionally undervalue the companies we own as it swings manically from overvaluing speculative companies that we have avoided.
Overall, I reiterate our expectation that we are currently in a period of base building that the markets should come out of in the second half of Q3 and into year-end during Q4. This timing is based on the average trajectory of the US Presidential cycle.
I am also including below the chart of markets historically going back to 1929 for Mid-Terms for First Term Presidents:
The top concern I have is the course of the 10-year US Treasury rate. As longer rates rise, it ends up being a hindrance to equity prices historically. Currently, we are back above the 3.28% rate that was the high point in 10-year at the June S&P 500 lows. Rising short rates that are orchestrated by the Fed seem to be having a greater impact on the lower- and middle-income consumer and is being reflected in increased credit card balances. This could be a precursor to increased delinquencies, but only time will tell.
Many are still concerned about recession risks. In Wikipedia, I found a very good study of what a recession looks like. If you would like to read this, I am attaching the link here: https://en.wikipedia.org/wiki/List_of_recessions_in_the_United_States
We are currently positioned in the areas that we feel should come out of this rate hiking cycle and international turmoil environment the best. As things change, we will change as well. As always, if you should have any questions or concerns, please do not hesitate to contact us. Steve, Rich, Spencer, Peter and I are all here at the ready!
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