August returns

Despite unstable markets, we closed August with +13.28% gains. As a result, the YTD return jumped to 71.36%.

Stocks remain on unstable footing. It feels to me like we are in a period of time where investors and money-mangers are clearly recalibrating risk as many on Wall Street continue to debate the prospects for a market rebound or meltdown in the weeks ahead.

After a seventh consecutive trading day of losses, the Nasdaq has now notched its longest losing streak since 2016, with the index down over -26% year-to-date. The S&P 500 has now lost -18% in 2022 while the Dow is down over -14%. Strong economic data has proven to be a real stumbling block for the bulls lately with Wall Street fearing that a “too hot” economy will force the Federal Reserve to maintain its aggressive monetary policy for longer than most have been anticipating.

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Data yesterday showed an increase in US services activity during a time of year when the sector typically witnesses a slowdown. That’s particularly worrisome as we head into the holiday season and the corresponding seasonal hiring surge, especially considering there are already nearly 2 jobs for every unemployed US worker.

Earnings season

Adding to the gloomy cloud hanging over markets right now is a raft of analyst downgrades for S&P 500 earnings in the quarters ahead. During the months of July and August, analysts lowered estimates for both Q3 and Q4 2022, as well as full-year 2022, with the tech sector leading the downgrades. However, that has been largely offset by upgrades across the energy sector, so overall S&P 500 earnings estimates for full-year 2022 have dropped only about -1.5%.

Meaning while analysts still see growth potential ahead, it is not necessarily expected to come from the same sectors and companies that drove the last decade+ of stock market gains.

Investors and insiders alike are also looking ahead to more potential dysfunction in Washington where Congress needs to pass stopgap funding legislation by October 1 in order to avert a partial government shutdown. That will be followed by the November midterm elections and the possibility that Republicans gain control of at least one house in Congress, leading to debt ceiling fights and shutdown threats that tend to come with an even more divided Washington.

Today, investors are anxious to hear Fed Vice Chair Lael Brainard deliver what could be a market-influencing speech. There are no details available but based on the title, “Economic Outlook and Monetary Policy,” Brainard could deliver more clues and insights as to what the Fed’s next moves might be. Brainard’s speech comes just ahead of Fed Chair Jerome Powell’s highly anticipated participation in a panel discussion on Thursday at the Cato Institute’s 40th Annual Monetary Conference.

Economic data today includes the Fed’s Beige Book and International Trade in Goods. There are also a handful of key earnings due today, including Casey’s General Stores, GameStop, and NIO. Let’s also not forget all eyes will be on Apple stock this week as its iPhone 14 event begins today.

Russia to Approve the Use of Crypto in International Trade: The Bank of Russia and the country’s Ministry of Finance have reconsidered their positions toward cryptocurrency, acknowledging it to be necessary to legalize the use of cryptocurrencies in cross-border settlements. Swamped in Western sanctions, the world’s largest country has sought alternatives to the U.S. dollar so as to guarantee the efficient trade of its commodities and crypto looks to be something they are eagerly pursuing.  Source Bitcoin Magazine

Inflation in Turkey Tops +80% – Turkey’s official inflation rate exceeded +80% for the first time in over two decades.

News feed

Energy Trading Stressed by Margin Calls of $1.5 Trillion: European energy trading is being strained by margin calls of at least $1.5 trillion, putting pressure on governments to provide more liquidity buffers, according to Norway’s Equinor ASA. Aside from fanning inflation, the biggest energy crisis in decades is sucking up capital to guarantee trades amid wild price swings. While governments across the region are stepping in to backstop struggling utilities, Finland has warned of a “Lehman Brothers” moment, with power companies facing sudden cash shortages. Many companies are finding it increasingly difficult to manage margin calls, forcing utilities to secure multi-billion euro credit lines, while rising interest rates add to costs. Helge Haugane, Equinor’s senior vice president for gas and power, said that the energy company’s estimate for $1.5 trillion to prop up so-called paper trading is “conservative.” What’s more, the underlying issue of the gas market is a lack of supply, and price caps won’t ease the strain or add to reserves, according to the Equinor executive. The liquidity crisis has largely spared the biggest trading houses, which are profiting from price volatility, while utilities bear most of the shocks, said Charif Souki, chairman of US LNG developer Tellurian.  Source Bloomberg

“Extreme Buyer Hesitation” Turning More Home Sellers Into Landlords: Home sellers are facing a tough market. The 30-year interest rate is sliding past 6%, according to Mortgage News Daily on Tuesday, compounded by recession fears, are holding buyers back. Put off by the softer market, some sellers in the south and the west are instead putting their homes on the rental market. Rick Palacios Jr., research director at John Burns Real Estate Consulting, said some of these homeowners were hoping to flip their house, but the cooling market is holding them back, he noted. The same trend is playing out among home builders. “There are a lot of builders that believe that the for-rent market can offer a hedge to a slowing housing market,” Ali Wolf, chief economist at Zonda, told MarketWatch. Wolf said she’s seeing the pivot happen where land prices are slightly cheaper, and where demand is still strong, like in Phoenix, Ariz., and parts of the south and the midwest. According to Apartment List, rents showed a deceleration in September due to a “slight uptick” in vacancies. That’s likely to increase as builders push further into the build-to-rent market.  Source Market Watch

US Consumers’ Purchasing Power Has Never Been Higher: Inflation is high, but U.S. consumers’ relative purchasing power has never been higher. An index that considers inflation when measuring the dollar’s strength relative to currencies of major U.S. trading partners in July topped its previous peak from 2002, showing how the dollar’s surge has helped mitigate rising domestic prices. The Real Effective Exchange Rate for the dollar, calculated by the Bank for International Settlements, measures the currency against a group of key U.S. trade partners, taking into account the changing prices of goods and services in each relevant economy, Julia-Ambra Verlaine reports. And the dollar has soared this year, in contrast to its declines during the inflation-plagued 1970s. The WSJ Dollar Index has gained in five of the past six months and is up nearly 13% in 2022. The dollar ranked behind only natural gas among the best-performing assets in August, according to Deutsche Bank analysts.   Source WSJ

Monthly Market Recap & Outlook 07.09.2022

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