Disclaimer: None of the following is legal or financial advice in anyway, and such advice should be sought from a legal and/or financial professional.
Despite what some may believe, there are few things more divisive or as important as money. After all it is the very lifeblood of entire economies, businesses, livelihoods and for many their personal dreams, goals and ambitions.
Its pretty safe to say that when it comes to money, and the markets, things seem to be in a pretty big mess at the moment. Fear and greed are rife, Supply and demand are out of balance, policy makers are … at the core of every major market and economic move, and some of the decisions just simply don’t even seem to make the smallest bit of sense.
A quick snapshot of the S&P500, paints a grim picture. Down 23% from its all time high and in a bear market, sentiment is shot to pieces. The battle of the bulls and bears is still on, and in just the last few days since the last Consumer Price index (CPI) stats being released, the market has been about as unpredictable as the news cycle covering it.
So, what should we expect? What comes next? There’s a swath of commentary on these various questions, so naturally … as someone who does his own trades … lets add another opinion into the mix.
Are we at the bottom? – Coming Back up
There are three arguments for suggesting that the markets may be at the bottom or due for some sort of relief rally. Firstly, there is the price action and money flow, heavily influenced by investor and trader psychology.
The recent dominant force throughout the markets and the economy has been inflation – no doubts about it. Markets have dropped on ‘fears’ of inflation rising only to bounce when negative data is released. The last CPI print did exactly that. When month-on-month (m/m) and year-on-year (y/y) data came in hotter than expected, the movements showed a strong turn downward, to replicate what took place in September, adding to further rate hike expectations … and then we had the opening bell. The index had one of the biggest bounces in recent history … followed by a drop the next day, some buying and some indecision all within a week.
Even bad news didn’t drive things downward. This leads to suggesting the market may be at a support level, corresponding with September and October 2020. Breaking through this level might take some serious selling … selling which simply might not be around.
And thirdly, lets look at the companies themselves. With earnings reports in full swing, some of the heavy hitters aren’t just reporting strong results, but also offering their ‘guidance’ as to the strength of the economy as a whole, that despite the headwinds, businesses at the coal face are still doing well.
And if things are strong, then … things shouldn’t get worse right?
Related: Why is it so hard to Start a Business?
Is there worse to come? – Going down
Aside from some of the bipolar activity in the markets as a whole, there is a case for things to get much worse. Higher interest rates have become the go to tool to try and calm inflation. Quantitative tightening as means to remove money from the economy is another.
Speculation is rife that there are more interest rates to come, and at this point, further rate hikes risk tipping the scales further to the downside. Rate hikes have seen the markets bounce too. The 75-point rate rise in June, saw the market pivot and start a rally … on the basis that the market expected the worst to be over.
The next fed meeting takes place in November a week prior to the midterms. The market charts at the moment show what looks to be a period of consolidation – sideways movements where many technical indicators get to soften, whilst the market gets a head a steam for the next movement. A 75 point move is expected again, and rationale dictates that finance dependant sectors will slump once more, and based on patterns … another 10% drawdown is a possibility.
Related: Its time to talk about energy
What can we expect?
What follows is a coarse, simplistic and frantic assessment from my personal perspective. Despite the ‘measures’ to reduce inflation and calm the markets, there are things that appear to be out of alignment.
One assessment pointed out a very interesting trend. Although the price of oil has dropped from the recent highs, bringing down the costs of energy, higher mortgage and increasing rent costs are keeping the levels of inflation high. Reaction? Jack rates again!
The need to support loans and repayments is what is keeping the job market strong … up to a point, where no amount of work will stop the regular person from becoming distressed; falling behind … leading to cut backs elsewhere in life. The massive slice of the population could reach a breaking point. Credit card debt has surged! Deduction? People are now using money they don’t have just to stay afloat … and the interest rates aren’t nice … sharks will be circling.
Winter is coming! The Strategic oil reserve is being exhausted, Europe plans to stop buying Russian oil & gas … supply and demand will be out of balance. The cost of energy is expected to increase and flow through every step in the supply chain, giving energy a second wind into 2023 … once energy starts to go up, id expect to see further demand destruction and for the slide to continue into 2023.
But who knows … November 8 might have an impact too!
Related: Can Rising Interest Rates Stop Inflation?
How to handle it and what to do next?
*Sigh*
Hindsight is perfect, foresight is not. Fear and greed are rampant. The S&P has swung 7% in the last week alone. So how to handle it?
If you’re an investor and you’re looking at the long term, then the chances are you don’t want to liquidate and if you do, you’d want another steep drop to re-establish yourself at a lower price point.
If you’re a trader, market movements can be a great way to make money both when prices go up and down … as long as your nimble enough to seize the shorter-term movements.
At times like this, where uncertainty is rife, the best non-advice I would hint at offering would be to get involved and to do the research. The outlook suggests that their may be upsides in some sectors with downsides in others. Even the safest havens and most defensive sectors still move.
And even the best research all comes to nothing once bets are placed. How to handle it? Who knows, things are changing day-to-day, risk mitigation is key. If anything … fundamentals matter. The short term is filled with noise, betting on larger trends today would make the most amount of sense.
Related: Dividends. Are they worth it?
Thanks Richard. Nice one! Please consider writing one on the larger trends (mentioned in the last paragraph), highlighting some of the themes/opportunities you may have explored.