The S&P 500 fell another 5% last week, putting us officially back in a bear market after a summer rally. An aggressive .75% interest rate hike by the Fed followed by comments the Central Bank may opt to reach a 4.4% rate by the end of this year spooked the market that the Fed leaders that misread the inflation data last year would misread it again this year and hit the brakes so hard on growth we all go spinning into recession. The Fed has previously stated this target would be reached NEXT year, so we're all left to wonder what will be left of the housing market in a few months with mortgage rates at 6.5%. This is the fastest series of rate hikes in U.S. history.
Economists (and I) worry that hitting the brakes on the economy this fast doesn't leave enough time for the economic situation to show up in the monthly reports despite the situation dissolving quite fast, leading to the Fed misreading the data instead of patiently waiting for prices and job growth to collapse.
A quick look at some big ticket pricing items shows inflation is coming down. Ocean freight shipping costs just hit a 2-year low. Crude oil just hit its lowest price since before the war in Ukraine began. Gas prices plummeted from $5.10 to $3.77 a gallon in the U.S in three months. Lumber prices are at pre-pandemic levels. Steel prices are the lowest they have been in 2 years. Mortgage applications are down 30% from a year ago. And the price of a steak - perhaps not a good one - has come down by -20%.
On top of the Fed worries, the quarterly sector rotation began, with asset managers unloading the year's winning stocks (energy, commodities, agricultural products). It's not clear what they are buying yet, but this quarterly exercise always creates some waves in between earnings seasons as well as buying opportunities.
While you were sleeping, the UK's new Prime Minister decided to cut taxes in an effort to stimulate the economy amidst a brewing energy crisis of epic proportions that the country's government is subsidizing. The combo of policy decisions is devaluing the pound, and European investors seem to be dumping stocks in response to recession fears.
Putin issued a draft of 300,000 men in Russia to support his war in Ukraine, and many are fleeing the country in response. The good news is those leaving will get to hear real news of the Russian invsasion for the first time in their lives. The bad news is desperate tyrants tend to make aggressive, impulsive decisions, and the War could get even uglier or drag other countries deeper into it.
The Jewish new year is here and there's a belief on Wall St. that selling stocks on Rosh Hashana and buying after the Yom Kippur, the end of the new year, is a solid event-driven plan. Indeed the data supports this, as the week has an average return of -.5% since 1971. This may be a self-fulfilling prophecy of the time of the prophets, but even as a small force, it likely contributed to the overall market decay last week.
Many believe the market will fall another 8-10% from here before bottoming out, and that the process could take months.
A long term investor not wanting to time the market perfectly would say we're at a good entry point for bluechip stocks like Apple, Visa, Google and Microsft. We continue to look for events to trade to stay safe, especially since the next few months will be turbulent until it's clear the Fed has enough signals inflation is breaking to chill out on the rate hikes.
Play of the Week
Freshpet: Activist Investor
Freshpet Inc, a pet food manufacturer, announced Thursday that a major activist investor took a near 10% stake in the company. In the last hour of trading on Thursday, FRPT flew nearly +19%. After an hour and a half of trading Friday morning, the stock was up another 6.2%. However, with the wide sell-off in the equity market, FRPT ended the day down -0.22%. It's a trader's market.
Event Impact: -0.22%
Did You Miss?
FedEx Corporation (FDX) Stock Buyback
FedEx shares traded higher Thursday afternoon after the company reported updated quarterly earnings results and announced a stck buyback. The company reported quarterly adjusted earnings of $3.44 per share, which beat average analyst estimates of $3.35 per share reset last week after the company reported its preliminary results. FedEx also announced plans to repurchase $1.5 billion of its common stock during fiscal 2023.
- Event Impact: +0.84%
- Peak-Trough: 6.86%
Raytheon Technologies Corporation Billion Dollar Contact
The Pentagon said Thursday that Raytheon beat Lockheed Martin and Boeing for a $1 billion contract to design, develop and produce a new hypersonic weapon for the US Air Force.
The cruise missile is intended to reach five times the speed of sound and compete with existing weapons Russia has developed. This would be the US Air Force's second hypersonic weapon, and it's likely not going to be the last. With $65B in annual revenue, the award didn't move the stock much although there was a pre-market rally. However, this award could signal longer term gains for additional contracts as the U.S. looks to ensure military dominance in the face of emerging threats. Raytheon net income is up 26% though the stock is down 6% this year following an 11% pullback this quarter.
How to profit when the market is crashing (part 2)?
There are many strategies to cover, but we believe the best way to profit is to stay in cash and trade events. In prior weeks, we mentioned ETFs like TBT and SQQQ which short bonds and indexes. TBT is up 13% over the past month while the SQQQ is up 50%.
Another strategy used in bear markets is to go positive on industries that will benefit from penny pinching, such as discount retail stores. Stores like Biglots, CostCo, and Five below benefit from customers going "down market" looking for better deals. The theory is a number of shoppers that would otherwise go to Target or higher end stores take their shopping to the discount retailers, increasing revenues at those stores. At the same time, a strong U.S. dollar means the retailers can buy goods overseas more cheaply and sell them for higher revenues, relative to the currency exchanges. Put plainly, they make more money in such an environment.
With shipping costs dropping and reports of extra inventory already on hand, the discount retailers may be set to have a great year in 2023. BIG and FIVE were both up Friday while most everything else was selling off. After horrible years thus far, it seems the real bargain hunting to be found at those stores lie in their share prices.
Notable Earnings Announcements This Week
- United Natural Food (UNFI)
- Earnings Estimate $1.26
- Vail Resorts (MTN)
- Earnings Estimate -$2.88
- Micron Technology (MU)
- Earnings Estimate $1.30
- September 27:
- US House Price Index set to report declines in home prices
- September 28:
- ECB President Lagarde's Speech
- September 30
- Personal spending & income (Fed watching this report closely)
The LevelFields Team