August Doldrums Strike Again

August Doldrums Strike Again

August 31, 2022

Happy (early) Labor Day to you!  I hope your holiday is joyous and fruitful.  Also, just a quick reminder that we are closed on Monday.

Back in June, I wrote an article that referenced three factors I thought were moving the markets.  It looks like we are down to only one factor now, but it’s a big one—Inflation data.  In July it seemed that inflation might be subsiding, and the markets loved it.  August seemed to bring back the volatility that July tried to tamp down.

The market is now making big moves based on inflation data and how the Federal Reserve is responding.  Each time the Fed Chair, Jerome Powell, makes a statement regarding interest rates the markets seem to react in a very volatile manner.  His latest statement that the market focused on was, “While higher interest rates, slower growth, and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses. These are the unfortunate costs of reducing inflation. But a failure to restore price stability would mean far greater pain.”  That is probably the last thing most investors or consumer households wanted to hear.  It was reflected in a huge selloff on Friday, August 26th.

So how do we get back to a market like July where volatility and pullbacks aren’t so pronounced?  Well, we can be hopeful in the data that is presented to us.  Of course, as a market optimist, it’s not always the easiest to see when stocks are falling, but it’s out there.

For starters, “market breadth” is a widely tracked indicator on how well stocks have historically performed following big up ticks.  Market breadth is the number of stocks that move in any direction.  If a large percentage move up, that’s a good sign because it would mean that investors are purchasing from many sectors and their respective stocks.  When market breadth is near 90%, it has historically been the start of a new bull market.  We nearly reached that point on August 11th when it was over 85%.  This doesn’t guarantee anything, but it’s a good confidence builder that we may start to renormalize once inflation is under control.  This is graphically shown in the image included.

Since that big up day, we’ve had a good retracement near the end of the month due to the Fed’s announcement.  However, another good sign was corporate earnings at just over 6% for Q2.  There’s nothing exciting about 6% as noted here, but it shows that companies have been able to maintain their profit margins during this high period of inflation and recent supply chain crisis.

I would say the most exciting prediction of all the big banks was from JPMorgan in the last couple weeks.  They reiterated their S&P500 price target of 4800 by the end of the year as noted here.  That’s nearly 20% higher than where it is now!  That sure does seem like a stretch and for every big upside prediction, there is a downside prediction out there somewhere.

Where does all this news leave us and our portfolios?  With long-term goals in mind, we stay the course.  It’s important that we set up our risk tolerances in advance of these movements.  I believe any investment decision we make should last at least five years.  This gives us time to sit through the ups and the unfortunate downs of the markets.

Have an excellent start of Fall on September 22nd.  Yes, that’s only three weeks away!  I would say my favorite part is either the smell of campfires or fall fishing.  Ever wonder how the day is picked for the start of Fall?  Here’s a neat article.