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Weakness in Stocks Continues to Coincide with Rising Interest Rates: Market Commentary from Cabana’s CEO – September 7, 2022

2 years ago

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Over the past several weeks we have discussed the “stock” market’s failure to re-claim the broad indices (S&P 500, Nasdaq and Dow) 200-day moving averages and the implications of that. In sum, the reversal from that level in mid-August keeps the bear market downtrend intact. Moreover, stocks have now fallen below their 50-day moving average, which provides additional support to this bearish perspective. 

The weakness in stocks has coincided (as it has all year) with a resumption in interest rates moving up. The 10-year is now above 3.3% and the 2-year is at 3.5%. Rising yields suggest more inflation and an aggressive Federal Reserve. On top of all this, economic conditions continue to come in strong. This could give Chairman Powell even more incentive to hike rates in September, and for the remainder of the year. What this also means is that perhaps we haven’t yet begun to see all the effects of the interest rate increases so far this year. When we do, the effects could be more severe, the more rates have increased at that time. This is the conundrum facing the stock market right now.  

So, just how big of a dent is this going to take out of companies’ ability to generate earnings? The bigger the dent, the bigger the drop in earnings and thus the price investors are willing to pay for the shares. This is called “earnings multiple contraction” and this calculation very well may lead to bigger declines in stocks going forward. We suggested that a break from the 50-day moving average would probably result in a test of the June lows sometime this month. That process is now very much underway. 

Last week I also suggested that these conditions have resulted in a “nowhere to hide” playing field for investors. With the exception of the U.S. dollar all major asset classes have experienced selling since then. This cross-asset convergence is historic and has resulted in the first six months of 2022 being among the worst on record for stocks and bonds simultaneously. 

Disclaimers

January 17, 2024

This material is prepared by Cabana LLC, dba Cabana Asset Management and/or its affiliates (together “Cabana”) for informational purposes only and is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. This material may only be distributed in its original format and may not be altered or reproduced without the prior written consent of Cabana. The opinions expressed reflect the judgement of the author, are as of the date of its publication and may change as subsequent conditions vary. The information and opinions contained in this material are derived from proprietary and nonproprietary sources deemed by Cabana to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by Cabana, its officers, employees or agents.  

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Commonly used index/benchmark definitions:  

All indices and categories are unmanaged and an individual cannot invest directly in an index or category. Index returns do not include fees or expenses. Benchmark indices will likely materially differ from Cabana’s portfolio strategies. Detailed information as to how the returns are calculated can be obtained online from the following link: https://thecabanagroup.com/disclaimers/performance-reporting-methodology/. 

Morningstar’s Moderate Target Risk index  follows a moderate equity risk preference and is based on well-established asset allocation methodology from Ibbotson Associates, a Morningstar company.  

Morningstar’s Tactical Allocation category includes portfolios that seek to provide capital appreciation and income by actively shifting allocations across investments. These portfolios have material shifts across equity regions, and bond sectors on a frequent basis. 

The S&P 500 Index is a market-capitalization weighted stock market index of 500 widely held large-cap stocks often used as a proxy for the U.S. stock market.  

The Russell 2000 and 3000 indices are market-capitalization weighted stock market indices that include, respectively, 2000 and 3000 of the most widely-held stocks and are often used as proxies for the U.S. stock market. 

The Nasdaq Composite Index is a market-weight capitalization index that covers more than 3,000 stocks listed on the Nasdaq Stock Market. What is the Nasdaq Composite, and What Companies are in It? | Nasdaq