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

3 weeks 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. 

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June 22, 2022

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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