Telemus Weekly Market Review December 5th - December 9th, 2022
After a strong two-month rally for stocks, we saw a -3.4% pullback for the S&P 500 this past week for, in our opinion, no reason other than economic conditions remain generally healthy, which gives the Fed sufficient reason to continue to tighten policy to fight inflation. We’ve hit a perverse phase of the market cycle, where good is bad and bad is good. Good being positive conditions give the Fed more reason to constrain the economy and bad leads many to question whether the Fed will have to take their foot off the gas.
As we take a step back and consider this past week’s selloff, we recognize that movements among stocks and bonds can occur for a number of reasons. We often bucket them into categories of macro (big picture), fundamentals (changes in corporate performance), and sentiment (investor emotion). Macro movements are often bigger shifts where a change in economic direction leads investors to revisit and adjust their positioning. Macro influences often create volatility but tend to be short lived lasting a few weeks to a couple months. Fundamental shifts can lead to more prolonged movements where investors often take several quarters to fully capture trends in the direction of company or sector’s earnings. Lastly, sentiment driven markets are propelled by directional buying and selling behavior. They often exaggerate movements as shifts in stock prices lead more investors to pile on to the trend in an effort to not miss out.
As we look at the movement of the market over the past two months, it began with expectations that we are nearing the end of the Fed rate hiking cycle. We’ve seen some evidence that the economy is slowing, which the market took as a positive indicator that the pain of rising rates might soon be over. We aren’t convinced of that and believe the Fed may hold rates higher for longer to ensure the inflation fire has been put out.
A rally for stocks was not unreasonable given how negative sentiment by October, pushing prices into oversold territory. However, as the rally extended into November, a broader investor base began to jump on the trend adding to their equity positioning. The uptrend, however, seemed narrowly driven given the 14% surge in the S&P 500 from October 12th through December 1st was not supported by macro or fundamental considerations. In fact, over the last two months macro expectations for the economy have been coming down. Recently we’ve seen several investment banks come out forecasting the probability for a recession in 2023 at well over 50%. We feel that, fundamentally, expectations among analysts for corporate earnings in 2023 remain too high, still expecting low single digit growth in earnings. Should the economy slow into a recession, it will be hard to grow earnings.
As we navigate the remainder of 2022 and into 2023, there are likely to be episodes where sentiment leads stocks, both on the upside and downside, to overshoot. Therefore, it’s important to look at the big picture with the wide-angle lens and not the zoom. Understanding there might be various considerations, albeit macro, fundamental or sentiment that influence investors differently is important to recognizing the rationale behind movements in the market.
All opinions expressed in this article are for general informational purposes and constitute the judgment of the author(s) as of the date of the report. These opinions are subject to change without notice and are not intended to provide specific advice or recommendations for any individual or on any specific security. The material has been gathered from sources believed to be reliable, however Telemus Capital cannot guarantee the accuracy or completeness of such information, and certain information presented here may have been condensed or summarized from its original source. PAST PERFORMANCE IS NOT A GUARANTEE OF FUTURE RESULTS. Investment decisions should always be made based on the client's specific financial needs, goals and objectives, time horizon and risk tolerance. Current and future portfolio holdings are subject to risk. Risks may include interest-rate risk, market risk, inflation risk, deflation risk, currency risk, reinvestment risk, business risk, liquidity risk, financial risk, and cybersecurity risk. These risks are more fully described in Telemus Capital's Firm Brochure (Part 2A of Form ADV), which is available upon request. Telemus Capital does not guarantee the results of any investments. Investment, insurance and annuity products are not FDIC insured, are not bank guaranteed, and may lose value. Any reference to an index is included for illustrative purposes only, as an index is not a security in which an investment can be made. Indices are unmanaged vehicles that serve as market indicators and do not account for the deduction of management fees and/or transaction costs generally associated with investable products.
Advisory services are only offered to clients or prospective clients where Telemus and its representatives are properly licensed or exempt from licensure. No advice may be rendered by Telemus unless a client service agreement is in place. All composite data and corresponding calculations are available upon request.