CAMS Weekly View from the Corner – Week ending 4/22/2022
April 25, 2022
Seemingly the stock market has been unaware that the Federal Reserve is far behind the price inflation curve and with this backdrop exists a need to raise interest rates consistently. The Fed is so far behind the inflation curve consistent rate increases alone may not beat the inflation issue. Larger interest rate increases than what is customary for the Fed may also be needed. In a public debate last Thursday Fed Chairman Jerome Powell offered that taming inflation is “absolutely essential” to quote the Chairman. In addition, he also stated that increasing the size of interest rate hikes in near-term Fed meetings is certainly on the table. Over the course of two days preceding Chairman Powell’s public statements the Dow Jones Industrial Average had increased nearly 1,000 points. In addition, it was attempting to break higher out of some pricing areas that it had previously struggled with dating back nearly a month. It seemed to have forgotten the price inflation/interest rate dilemma the Fed is in and by extension the dilemma the citizenry is in with trying to keep up with price increases. By Thursday afternoon the stock market got the Chairman’s message and experienced an eye-opening epiphany expressed as a consistent downtrend, hour-by-hour, all the way through Friday’s close. The previous 1,000 point upturn quickly backpedaled into a 1,700 reversal to the downside and is so doing easily exceeded pricing areas that were holding over the previous month. In just over three days the Dow went from attempting higher levels than what had been seen in the previous month to lower levels of which had not been seen in the previous month. Yet again, we see the stock market suggesting “all clear” (or “clearing up”) signals only to quickly reverse and offer “we may have a problem” signal. The Smarter Market Some markets are often considered to be smarter than other markets in that they have a history of seeing the future better than others and hence the labeling as being smarter. When it comes to the bond market it is often viewed as a smarter market when compared to the stock market. With this we can’t help but feel the bond market smiled a bit at the stock market in light of its reaction to Chairman Powell’s comments. As if to say, “Really, you didn’t see this coming?” We offer this a bit tongue-in-cheek and yet seriously in that the bond market’s message throughout 2022 has consistently been offering the Fed has a price inflation/interest rate dilemma (i.e. they are far behind the inflation curve) and has expressed this by posting the worst bond market performance in recent decades. Said differently, bond participants have sent bond prices consistently lower and in so doing have raised the interest rates (yields) on bonds consistently higher; their response to the price inflation issue. To be certain the stock market has not posted a positive 2022 in terms of its own price performance but has done so more in fits and starts whereas the bond market has consistently offered throughout 2022 “we have issues” in our economic system. Bringing Them Both Together Within the bond market there is an area known as High Yield (a.k.a. Junk Bonds) which are bond instruments offered by companies that are viewed as lower on the credit worthy spectrum and hence pay a higher interest rate in order to satisfy investors in light of the higher risk that comes with these companies. These bonds collectively trade with a cohesiveness to the stock market generally. With this, they too can act as a signal for the general direction of the stock market looking forward. By last week’s close they sent an additional cautionary message.
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Above is a two year picture of the High Yield bond market on a price basis. The black arrow highlights the clear downtrend this market has also been in for the bulk of 2022. In the previous month-plus it had stopped going lower while attempting to bottom. A bottoming process is constructive as long as it can hold. This past week, via our black horizontal line, this market did not hold and penetrated below our line representing a lower low for High Yield bonds. This offers additional concern for the stock market in that this area of the bond market is correlated to stocks and has sent an additional negative message. The stock market itself, post Chairman Powell comments, also displayed a litany of issues offering additional concern. These markets need to hold here as previous lows in various stock market indices are not far away. If they break we could see lows not experienced thus far in the stock market for 2022. Caution continues to be warranted. I wish you well…
Ken Reinhart
Director, Market Research & Portfolio Analysis
Footnote:
H&UP’s is a quick summation of a rating system for SPX9 (abbreviation encompassing 9 Sectors of the S&P 500 with 107 sub-groups within those 9 sectors) that quickly references the percentage that is deemed healthy and higher (H&UP). This comes from the proprietary “V-NN” ranking system that is composed of 4 ratings which are “V-H-N-or NN”. A “V” or an “H” is a positive or constructive rank for said sector or sub-group within the sectors.
This commentary is presented only to provide perspectives on investment strategies and opportunities. The material contains opinions of the author, which are subject to markets change without notice. Statements concerning financial market trends are based on current market conditions which fluctuate. References to specific securities and issuers are for descriptive purposes only and are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities. There is no guarantee that any investment strategy will work under all market conditions. Each investor should evaluate their ability to invest for the long-term, especially during periods of downturn in the market. PERFORMANCE IS NOT GUARANTEED AND LOSSES CAN OCCUR WITH ANY INVESTMENT STRATEGY.
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