by Bryan Perry

June 22, 2022

What a rough ride for investors this month…and quarter. The stock market has declined in 11 of the past 12 weeks, with the past week being the worst since March of 2020, when COVID struck. Just to highlight the events that have taken the market south, the CPI data of two Fridays ago killed the short-term “peak inflation” narrative, then this past week’s economic data pointed to a marked slowdown in the making.

The Philadelphia Fed Index for June came in at -3.3 (versus a consensus forecast of +5.0). That data point is a regional Federal Reserve Bank index measuring changes in business growth, which showed material slowing from May. Housing starts for May came in at just 1.549 million (10% below the 1.715 million forecasted), and building permits for May were 1.695 million (versus 1.800 million forecasted).

Some of the changing sentiment surrounding the slower housing and retail sales data for May will surely show a further deterioration when the June data comes out. Last week’s 75-basis point rate hike was initially seen as a good move on the part of the Fed, but the euphoria quickly died after the Swiss National Bank and other central banks moved to raise rates overnight with little or no notice.

Coming into this period of Fed tightening, the hopeful theory was that households were sitting on robust levels of accumulated savings that would help them weather any “soft landing” orchestrated by the Fed going into the fourth quarter, when the economy would resume its 3%-4% growth rate accompanied by inflation down around 4%. As of last week, however, the case for a “hard landing” (recession) became more prominent, but here, too, the situation could just as easily improve with further softening of energy prices, any hint of new negotiations in Ukraine, or further unclogging of the global supply chain delays.

One encouraging development was seeing the market trade flat-to-up on last Friday’s quadruple options expiration for June. Another boost was real evidence of hard and soft commodity prices declining led by a stiff sell-off in energy. It seems as if the market is finally experiencing some seller exhaustion that has the S&P now trading with a P/E of 15x while down at a level quickly approaching a crucial 200-week moving average that sits at 3,500, and a technical level that is likely to invite strong bids to hold the line.

Standard and Poor's 500 Stock Index Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

Investors will be on the lookout for how a stronger dollar is curtailing earnings prospects for big U.S. multinational companies. Microsoft Corp. (MSFT) has already made known that its earnings will be impacted by forex headwinds, and Adobe Systems Inc. (ADBE) echoed the same issue in their most recent quarterly results. This is now a known risk, so it has probably been priced into their shares as part and parcel of the recent market weakness.

The market is now on “earnings warning watch” – on high alert for companies to pre-announce lower profits due to higher borrowing costs, transportation costs, lockdowns in China, and slower inventory buildups due to deteriorating consumer confidence, which registered its lowest reading on record.

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

Similar to the S&P 500’s chart formations, the Nasdaq 100 is close to testing its key 200-week moving average, as it successfully did back in March 2020.

Nasdaq 100 Stock Index Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

The next two to three weeks will likely see the market witness a lot of chop and lateral movement, seeking catalysts and hanging onto every data point. But investors should know that individual stocks tend to bottom three to six months before the major averages do, and there are multiple cases of leading market stocks that have corrected 40% to 50%, even when the S&P has shed only half as much, c. 23%.

Here’s more good news. While at a large gathering this past weekend, I spoke with as many people as possible and asked them how business conditions were. To my surprise, every person said business is “brisk.” Surprisingly, even a homebuilder was positive on business prospects. Yes, they said their stock portfolios had tanked 20% to 30%, but no one was cancelling their vacations, their season tickets, their private school tuition bills, or cancelling new purchases for big-ticket items. Life was still pretty good.

The bad news is that inflation is hitting those 64% of Americans who live paycheck-to-paycheck the hardest, and that is what could tip the economy into recession if inflation doesn’t swiftly cool by year’s end. After that, history shows that markets are naturally self-correcting through demand destruction.

To say that the current economic landscape is highly fluid is almost an understatement, and predictions at this point are, in my view, pure speculation. What does seem clear is that the next 30 days will provide immense insight as to whether the market has endured enough pain and can hold the long-term uptrend lines noted above, and regain the confidence of investors. That’s the beauty of earnings season, and I can’t think of one that has more significance to the market’s outlook than the upcoming reporting season.

Navellier & Associates owns Microsoft Corp. (MSFT) in managed accounts. We do not own, Adobe Systems Inc. (ADBE). Bryan Perry does not own Microsoft Corp. (MSFT) or Adobe Systems Inc. (ADBE) personally.

All content above represents the opinion of Bryan Perry of Navellier & Associates, Inc.

Please see important disclosures below.

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About The Author

Bryan Perry

Bryan Perry

Bryan Perry is a Senior Director with Navellier Private Client Group, advising and facilitating high net worth investors in the pursuit of their financial goals.

Bryan’s financial services career spanning the past three decades includes over 20 years of wealth management experience with Wall Street firms that include Bear Stearns, Lehman Brothers and Paine Webber, working with both retail and institutional clients. Bryan earned a B.A. in Political Science from Virginia Polytechnic Institute & State University and currently holds a Series 65 license. All content of “Income Mail” represents the opinion of Bryan Perry

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