by Eric Nager on Sep 16, 2022
Last month the market had a strong rebound from the June lows, but now we are in the midst of a second leg downward. As of the time of this writing, the market has given back roughly half of its recent gains. Most likely the downward pressure is not over; and, along with that pressure, we are in the most difficult period of the year historically for stocks (September to October). Furthermore, we are still dealing with inflation (currently running around 8%) and the evidence of a looming recession, or at least a significant slowdown in the US economy. Therefore, it would be logical to conclude that we will go back and retest the June lows. However, conventional wisdom is not necessarily a reliable predictor of future outcomes.
What are some other more positive factors to consider?
- Often, but not always, the market bottoms out in late September or October, and we are already one-third of the way through September.
- Corporate earnings have decreased but are still expected to be positive for the third and possibly fourth quarter.
- Inflation may have peaked for this cycle; that does not mean the problem is solved, however, it would indicate that it may not become more severe.
- Fed Chairman Powell has been very vocal about his determination to remain firm in his resolve to raise rates as much as necessary and for as long as needed to defeat inflation. His stance to be like Paul Volker is laudatory, but will a Fed Chair that has not been strong on monetary policy be able to stand up to political pressure when faced with a contracting economy? If not, the market will react favorably to any indication that the Fed is beginning to back off or even reverse course. Remember the adage: “Don’t fight the Fed.”
For the time being, we at Southern Capital Services are remaining in value-oriented funds, inflation hedges, an energy ETf, and cash. However, we will be looking to begin returning to more traditional asset mixes in our portfolios when we can determine that the market has likely bottomed.