From the Trading Desk: New Bull or Hopeful Bounce? 

As mentioned in the last post, volatility across markets appears here to stay. The days of buying and holding an index might be long gone. Shareholders of the popular tech companies will not likely see anywhere near the gains that we saw in the last cycle. The S&P 500 Index reached a new low for the year in September, falling over 9% and down 24% in 2022. 

The market environment of the past 10 years is likely gone. The Fed is fully committed to reducing inflation by raising interest rates, even though they know it will be nearly impossible to accomplish without causing a recession. Yet, it looks like the hope is not dead and many investors still believe the Fed could pivot and equities could regain their past strength. Boosting this hope, were the opening trading days in October which were the best two days for equities in years. 

S&P 500 Index (SPX) 6-months daily chart

Richmond Fed president, Thomas Barkin said last week, “our efforts to stabilize inflation expectations could require periods where we tighten monetary policy more than has been our recent pattern.” More Fed officials have hinted the path of the Fed will remain true to their goal with two more possible rate hikes before the end of the year. 

Higher production costs for companies are forcing them to raise prices to the final consumer, who takes on the burden of higher costs (inflation). Eventually, the time when companies cannot pass on the increased costs to the final consumer will come, reducing profitability, and compressing margins. When profitability and earnings start to be affected by higher rates and higher costs of production, company valuations will be affected causing stocks to drop further. This is happening globally, and it looks far from over.  The following chart is the Eurozone Producer Price Index showing more than a 43% increase year over year (YoY). 

Eurostat PPI Eurozone Industry Ex Construction YoY (EUPPEMUY Index) 1 year

Looking at commodities, oil rallied over 10% this week on the expectation that OPEC would cut daily output which was announced on Wednesday. Goldman Sachs raised its forecast for the commodity to $110 per barrel before the end of the year and Morgan Stanley see’s $100 per barrel sooner rather than later. This news comes as the US is fighting elevated energy prices and President Biden stated his disappointment in OPEC’s actions. The Biden administration is considering further strategic oil releases on top of millions of barrels already released this year. 

With only three months left in the year, time will tell if the current trends persist or if this week could be the beginning of a new bull.