Week of Sep 5, 2022
Opening Remarks
With volatility relatively stable and the SKEW index at 119, we expect a week with minor ups and downs (but generally trending down). We don’t see any catalyst that will result in a significant sell-off. In our opinion, as the markets gradually accept the Fed’s position on inflation with the expected rate hikes, the next two months will be mostly about repositioning and deploying assets where it suits investors the best. Although higher rates are detrimental to the growth stock valuations, they might facilitate new opportunities such as investment in fixed income and its derivatives.
Below are the reasons that will put downward pressure on the value of the stocks:
1) Historically, September and October have been unfavorable months for stocks, with prices usually dropping. This being on the mind of investors combined with uncertain economic conditions are basically ingredients for a self-fulfilling prophecy coming into action and driving the prices lower for no good reason except for the fact that markets are expecting it.
2) Bonds have been out of favor in the past decade due to low returns. The recent rise in interest rates and the pursuing increase in bond yields make a strong case for holding bonds. So naturally, the money that would have otherwise been invested in the capital markets will be deployed elsewhere. This will result in cooling off the stock markets.
3) The multiples are still at the upper side of the historical range. There is still room for adjustment. In addition, the earnings are yet to reflect the impact of the recent changes in the economy. We believe that the full impact of recent changes (rate hikes, back to office movement, higher rents, etc) will be reflected between Q3-2022 to Q1-2023. We expect that a majority of the earnings reports to be disappointing with a few positive ones.
On Monday, OPEC+ announced it will cut production by 100,000 barrels, reversing its decision a month ago to increase the output by the same amount. In its statement, OPEC+ indicated lower projected demand as a reason for the cut as it sees certain economies struggle through the year-end. A quick reaction to this news would have been the expectation that the energy sector will show an increase in prices. But on the contrary, the prices of the energy stocks fell on Tuesday.
Important events during this week:
- ECB’s decision on policy; expected to be 75 bps
- Apple unveiling iPhone 14.
- Initial jobless claims; Consumer Credit; Wholesale Inventory; Wholesale Sales
On Tuesday, September 7, 2022, the US Census Bureau released July’s trade deficit, which stood at $70.6 billion, down from $80.9 billion (revised) in the month of June.