Did you know that tug-of-war was actually an Olympic sport from 1900 to 1920. Now I’m generally someone who embraces the new and doesn’t reflexively believe that the past is better. But in this case I’ll make an exception. Tug of war should be added back to the Olympics immediately. And I feel like it could help the Olympics with their ratings problem. Tug of war is on my mind because it’s exactly what happens in the stock market (SPY) as the bulls and bears struggle for control. On the bullish side you have falling inflation, resilience in earnings and employment data and high levels of under-invested or under-invested traders/investors. On the bearish side you have an aggressive Fed, a slowing economy and several tail risks that could turn into an outright crisis. In today’s commentary, we will discuss these market dynamics and then dive into various topics. Read on below for more information….
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(Enjoy this updated version of my weekly commentary, published August 29)e2022 of the POWR Growth Newsletter).
As usual, we start with a look back at the past week…
Here is a quarterly hourly chart of the S&P 500 (SPY):
This week was pretty brutal for the market as we were down about 3%. Of course, most of the losses came in the last 2 days after Fed Chair Powell’s Jackson Hole speech, which essentially wiped out all hopes of a Fed pivot as he remains steadfastly committed to the goal of curbing inflation.
This view was further confirmed by Neel Kashkari, chairman of the Minneapolis Fed, who today said he was dissatisfied with the market rally after the July FOMC meeting. This is another indication of the Fed’s ultra-hawkish stance.
An interesting note on recent market action is that we are seeing strength in the commodities complex as oil is high for almost a month even though stocks are lower. This is sub-optimal for bulls who want oil prices to continue to fall. However, I think this has something to do with the energy crisis in Europe related to natural gas shortages due to the war between Russia and Ukraine.
And this leads to upward pressure for all types of energy commodities. This in turn leaks into other markets, such as agriculture, as natural gas is an input for fertilizer production.
I really believe this is an underestimated aspect of the market’s weakness as we hit the 200 day moving average a few weeks ago. Higher energy prices mean more inflation. More inflation is bad in itself, but it also means we are further away from a Fed pivot.
An alternative path…
One solution to this mix of bullish and bearish headwinds is that we see the market remain stuck in a range. In fact, 2022 can be described as a handful of trending moves and a lot of just choppy, sideways price action.
In fact, I am leaning more and more towards this path. As for the optimal strategy for this environment, we want to focus on the handful of stocks that are actually trending and use periods of market weakness to increase exposure.
On the other hand, we also need to be more disciplined in our positions in terms of stop loss and more modest in terms of our profit targets.
Buffett vs Burry
Two of the most successful investors of our lives are Michael Burry and Warren Buffett. Burry was featured in ‘The Big Short’ and he climbed to billionaire status by shorting subprime mortgages. Even before that, he had an impressive record of outperformance in both bull and bear markets.
Warren Buffett, of course, needs no introduction.
That’s why I was very interested to see from recent SEC 13F filings that Burry has sold all of his stock except one – GEO – a private prison company. (This is a theme that we have discussed extensively as it has huge potential under a ‘red wave’ scenario).
On social media, Burry is very loud and bearish (even changed his username to ‘Cassandra’).
By contrast, Buffett was a stock buyer in 2022 after not buying for much of 2020 and 2021.
There isn’t necessarily a simple deduction from this disagreement, just a reminder that this is a very challenging and confusing moment in the stock market (SPY).
US dollar is destroying the world economy
If we were to look at past periods in which the Fed has been gearing up to “normalize” monetary policy over the past decade, something would happen that would cause them to “hit” on the decision.
Essentially, the US dollar would begin to appreciate in anticipation of a Fed tightening cycle. The stronger dollar would hurt emerging countries with huge deficits, as many of them borrow in dollars but earn tax revenues in their own domestic currencies.
There would also be pain in terms of countries that depend on imports for food and energy as the prices of these would also rise.
This is happening now as we see riots and pain in many countries coping with inflation and a weakening currency at the same time. This time, the Fed does not seem compelled to act to ease this pain, as it is limited by high inflation.
Given that the Fed currently appears unwilling to pursue a pause or even a slower pace of gains, this pain is only set to increase. It also reminds us that as bad as things are in the US, they are much worse in the rest of the world.
Fed Put is now a Fed Call
Related to this is something I’ve been thinking about. Over the past decade we had a ‘Fed put’, which meant that every time growth slowed or stocks fell, investors could rely on the Fed to step in, creating a virtuous cycle of confidence and higher prices.
This meant that asset prices continued to rise despite a subdued economy.
Now we have the Fed call. And no better example of this than the past 2 weeks, when speaker after speaker from the Fed emphasized that the fight against inflation was far from over.
Essentially, the Fed needs to tighten financial conditions and lower asset prices to verify that this is indeed the case tightening policy.
This means that while the real economy is relatively strong and profits continue to grow, asset prices are lower.
What to do?
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All the best!
Jaimini Desai
Chief Growth Strategist, StockNews
Editor, POWR Growth Newsletter
SPY Shares. Year-to-date, the SPY is down -14.60%, versus a % increase in the benchmark S&P 500 index over the same period.
About the author: Jaimini Desai
Jaimini Desai has been a financial writer and reporter for nearly a decade. His goal is to help readers identify risks and opportunities in the markets. He is the Chief Growth Strategist for StockNews.com and the editor of the POWR growth and POWR Shares Below $10 newsletters. Learn more about Jaimini’s background, along with links to his most recent articles.
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