A Summer's Market Recap

A Summer's Market Recap

August 25, 2022

As the summer draws to a close, let’s review market performance for the last few months to see if it will give us a clue as to where we might be headed in the future.  I have listed several things below that usually are good market indicators. The bulleted points are a few of the factors that can move markets either up or down.

  • Corporate Earnings
  • Fed Monetary Policy
  • Employment
  • Industrial Production
  • Consumer Demand

Corporate Earnings: As of last quarter, corporate expectations either met or exceeded expectations even with a strong dollar. Usually, large companies such as Apple derive a substantial amount of their revenue from foreign sales. After converting sales to dollars, a loss of revenue can occur depending upon the currency differences. A strong dollar can lower company profits. Over 75% of reporting companies either met or exceeded expectations despite a strong dollar. The 4th quarter is usually the best quarter for most companies.

Fed Monetary Policy: If the Fed does not go crazy and raise interest rates too quickly, it is likely the economy can absorb the rate hikes without a deep recession. Only time will tell how this plays out. In my opinion, the Fed will do whatever is necessary to get inflation under control.

Employment: This is the one that has economists scratching their heads. Usually, high inflation is followed by unemployment as companies try to cut costs. There are going to be layoffs, but so far those being laid off are finding work other places.  Unemployment is unusually low at 3.6%. So far so good. We will be watching this closely.

Industrial Production: No problems here. If anything, our country has learned a very hard lesson. When the world encounters events like a pandemic, it is very wise to have goods manufactured at home as opposed to relying on disrupted supply chains. Manufacturers are coming home in large numbers to have their products manufactured here. Very good.

Consumer Demand: Even considering increasing costs, retail sales and consumer demand show no signs of slowing down. Consumers are shifting purchasing from discretionary purchases to spending more on staple goods. While not keeping pace with inflation, wage growth has at least allowed the consumer to continue spending.

 As of last Friday, August 19th, the S&P had retracted over 50% of the bear market decline. Some technicians reported last week that since 1950 if the S&P composite recovered 50% during a bear market, it has never retested the bear market lows. If this proves to be accurate, it is likely the S&P will not experience the low point we saw in June. All the factors above and the breadth of this rally gives up hope that the market has possibly turned the corner. The VIX or volatility index would support this as well. Recently it fell below 20 for the first time in weeks. Anything under 24 is usually a sign of lower volatility. Opinions are split as to where the economy is headed. Be patient and realize that going back over many years the market is up almost 75% of the time.