Rearview to Windshield, October 2022

by | Oct 4, 2022 | Blog, Market Updates

Developments Over the Past Month


Can you Hear the Fed Now? September 2022 Market Recap: At the end of September, the Fed removed any remaining doubt about its commitment to getting inflation under control. As a result, both bonds and stocks sold off sharply. With the debate now over about whether the rally this summer was either a bear market rally or a new bull market, the question becomes how low do we go from here and what will drive it? As we have been arguing for months, the ultimate lows for stocks, and highs for yields, will likely be determined by the growth trajectory in earnings and the economy rather than inflation or the Fed. Finally, the recent move in the US dollar creates an untenable situation for risk assets that historically has ended in a financial or economic crisis, or both. While hard to predict such “events,” the conditions are in place for one, which would help accelerate the end to this bear market.



No Help from Bond Markets: The pain in the bond market largely continued in August and September, with the U.S. Aggregate Index now down almost 15% year-to-date. Since the late 1970s, no other year has come close to experiencing similar pain in the bond market. U.S. bonds are now 16% off their peak in July ‘20. Except for the drawdown that ended in February 1980 (when the index was only calculated monthly), this is almost twice as large as the next biggest drawdown on record. Global bonds have fared even worse. In total, the drawdown in global bonds has now reached almost 24%.


Fed Meetings Recap: Per the September FOMC meeting, the committee seems less concerned about goods inflation (which should reverse), but rather the lingering effects on sticky prices & wages. Avoiding a stop-and-go monetary policy remains the key moving forward. The great hope is that there’s an ability to destroy job openings before destroying many jobs. The Fed raised rates by 75bps, which increases the terminal rate in ’22 to 4.4% and 4.8% in ’23.


Bear Market Bounce or is the Bottom in? It appears that the debate surrounding June’s rally has been answered – more of a bear market rally than the beginning of a new market. Thus far in ’22, investors have seen 4 bear market rallies. One of the observations that we’ve seen in recent months is that bear market rallies grow larger as the bear market grows older. Whether the Fed is close to finishing tightening, or they are cutting rates, we imagine that every bear market rally during past bear markets (2000-03, 2007-09) generates the “it’s the bottom” conversation every time – this time was no different.


Where is The Fed Put? We continue to believe that the Fed Put is much lower right now, as FOMC Chairman Jerome Powell has stated that the Fed is going to keep raising until we have a recession unless inflation meaningfully improves. The cause of the decline is equally important. The Fed has a long history of easing policy in response to earnings drops, but there isn’t much evidence that it responds to multiple compression. The fact that inflation is higher than at any time since the genesis of the Fed Put and that stocks have appreciated a lot over the past two years suggest the strike is well below current prices. Similarly, the recent decline in stock prices owes exclusively to lower multiples; it would take another leg down induced by a drop in earnings to impress the Fed.


“Phantom Earnings” Moving Forward: Earnings likely to play an increasingly bigger role from a directional standpoint given the debate about the extent to which consensus estimates still need to come down to reflect a softening macro backdrop and inflation/margin pressures. We remain skeptics that the current 2023 earnings expectations for the S&P 500 can be met. On average, earnings, as a whole, tend to fall between 15% – 20%, of which, earnings are only 5% off their highs.


Earnings Season: Overall earnings season last quarter showed signs of improvement, much better than anticipated by many economists. The S&P 500 year-over-year earnings growth now stands at +7.9%, with revenue growth increasing +12.1%. Looking at S&P 500 EPS and S&P 500 Ex-Energy EPS shows just how significant of a contribution the sector made during the second quarter. The Q2 reading would have been nearly $8 less if it weren’t for energy’s contribution. With a 16% earnings contribution weight and only a 4% market cap weight for the second quarter, it becomes evident that the energy sector is boosting corporate profits.


S&P Valuation: The S&P 500 valuation continued to compress in the quarter, as did the market in August and September, now trading at 14.7x (17.3x last month). Valuation is becoming more palatable as the market continues to digest higher-for-longer inflation, a potential earnings cliff, and the full tilt transition into Quantitative Tightening.


Earnings: 2022 S&P 500 operating earnings = $225 (+10.3%). 2023 = $244 (+8.4%). 2021 = $204. 2020 = $136. 2019 = $161.

Valuations: S&P 500 Fwd. P/E: 14.7x, EAFE: 11.1x, EM: 10.4x, R1V: 12.1x, R1G: 20.4x, and R2K: 11.1x.*

*Source: Bloomberg and FactSet, Data as of 9/30/22







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The S&P 500® is widely regarded as the best single gauge of large-cap U.S. equities. There is over USD 11.2 trillion indexed or benchmarked to the index, with indexed assets comprising approximately USD 4.6 trillion of this total. The index includes 500 leading companies and covers approximately 80% of available market capitalization.

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Investment-grade Bond (or High-grade Bond) are believed to have a lower risk of default and receive higher ratings by the credit rating agencies. These bonds tend to be issued at lower yields than less creditworthy bonds.

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