It’s Heating Up
I hope all of you had a wonderful 4th of July and had some time to enjoy family and friends as we celebrated this great country we call home. I love that America was built on the principles of life, liberty and the pursuit of happiness (straight out of the Declaration of Independence). As we watch the war in Ukraine wage on, I think we all can agree that we have it pretty good here in America. Yes, inflation is taking its toll, the markets continue to decline and the economy appears to be on the brink of a recession, but I’m reminded every day that we have a lot to be thankful for. Don’t let all the negative news steal your joy. Remember, you have a team here at ClearPath Financial that is working hard to protect your financial freedom. If you are feeling anxious about your retirement or just want to discuss something related to your finances, don’t hesitate to reach out and talk to us. I hear this line quite often from clients and it goes something like this – “Well, I didn’t want to bug you, but…” Trust me, you are never “bugging” us when you want to discuss something related to your retirement. Remember, we work for YOU and we are here for you. We can’t thank you enough for trusting us. From all of us here at ClearPath Financial we truly hope you have an amazing summer. Stay safe, have fun and God bless!
Here is what we are covering in the July newsletter:
- The Heat is On - Market Updates
- What the analysts are saying – Quad update
- What are the signs the market is bottoming?
The Heat is On – Market Updates
It’s early July and just like the weather, things are definitely heating up. This is an extremely important month on multiple fronts. We have fresh new data coming out on the economy, inflation and earnings reports. Most experts predict that the June inflation (CPI) numbers will remain hot and even the super conservative Cleveland Fed has its CPI nowcast for June at 8.5-8.6. Remember, May’s CPI number came in much hotter than expected at 8.6 (highest in 40 years). If CPI does come in again above 8.0, the Fed will be forced to maintain its hawkish stance and continue to aggressively raise interest rates. The jobs report just came out today (7/8) and the data was better than expected. This is a case where good news is bad news for the market. When the labor data comes in strong and inflation remains high, the most likely outcome is that the Fed will be locked into raising interest rates 75 basis points over the next two months. We had a nice little bear market rally to start out July based on what many predicted to be the start of disinflation and a more dovish Fed heading into the Fall, but that rally may run out of steam soon and the markets make another trek downwards as fears of runaway inflation return. Here is a look at what the markets did in June:
- The S&P ended more than 8% lower for June and has now closed in the red for four of the six months in 2022
- Healthcare -2.8%
- Energy -17%
- Consumer Staples -2.9%
- Utilities -5.1%
- Real Estate -7.5%
- Materials -14.1%
- Financials -11.1%
- Industrials -7.5%
- Communication Services -7.7%
- Consumer Discretionary -10.9%
- Information Technology -9.4%
I love this Heat Map from finviz.com that shows the S&P 500 year-to-date performance on one graphic. As you can visualize, it’s pretty much a sea of red with only Energy being the one green sector in 2022:
https://finviz.com/published_map.ashx?t=sec&st=ytd&f=070822&i=sec_ytd_121845035
Here is a look at the different asset classes and how they have performed year-to-date:
Analysts Updates – Welcome to the 2nd Half of 2022
It’s hard to believe that we are officially in the second half of 2022. Our Macro Data analysts team is are an all-star cast of some of the best financial analysts and macro-economic experts in our industry. We love them because they use math as the basis for their models and guidance and NOT emotions or feelings. As they often say, “Hope is NOT a risk management process.” I agree wholeheartedly that Math > Emotions. One of Hedgeye’s risk management tools is their GIP (Growth Inflation Policy) nowcast model. The mathematical data that goes into this model is truly amazing, consisting of thousands of data points from across the two strongest factors that influence how the market will behave, inflation and economic growth (GDP). While no one has a crystal ball on what the markets will do on a short term basis, I believe that our GIP model is the best tool available to predict where the markets will go in the intermediate to long term. The numbers do not lie. Here is the latest Quad Map from our Risk Management team (X-axis = Inflation / Y-axis = GDP):
© Hedgeye Risk Management, July 1, 2022
To keep it simple, Quads 1 & 2 are generally very good for the markets, while Quads 3 & 4 are generally very bearish. Looking at the Quad map above, Q1 and Q2 technically finished in Quad 3 (Stagflation), but as they always say the markets are forward looking. Zoom in on the 3rd and 4th Quarter of 2022 and you will see that we are expected to be in a deep Quad 4 setup all the way into the 1st Quarter of 2023. The data is predicting a massive rate of change in Gross Domestic Product (GDP) as the economy slows down in response to high inflation and rising interest rates. How much is priced in is the question? No one knows for sure, but we are continuing to tread very cautiously with our portfolio models as the data implies that more pain is on the way. Our biggest positions remain long US Dollar (USDU), Anti Beta (BTAL) and Gold (BAR & IAUF). We will continue to carve out a large position in cash that will be used a “dry powder” reservoir to buy the dip when we eventually come out of Quad 4 in the future.
What are the signs the market is bottoming?
We get this question a lot. It is not an easy answer but one worth discussing as we head into the 7th month of a bear market. Here is a short list of things I believe will be signs the bottom is forming in the stock markets:
- The Fed will pivot and start talking about rate cuts instead of rate hikes.
- Quantitative Tightening (QT) will end and Quantitative Easing (QE) will resume as the Fed backstops the market from crashing more
- Inflation finally comes in under 6.0 (CPI)
- Crypto coins start to blow up (already seeing this now – several have stopped redemptions)
- Certain small cap and SPAC companies start to go bankrupt (i.e., Carvana)
- Housing market cools off and prices come back down to Earth
- Markets start pricing in higher lows and higher highs.
While this list is not all-inclusive it is a good start. It is impossible in the middle of a market crash to call the bottom with any true conviction and certainty. Market bottoms are not single points in time. The bottoming is a process that will play out over several months and will involve multiple head fakes in both directions. We continue to monitor these factors along with many others as we risk manage your hard-earned retirement savings. When it’s time to pivot to a more aggressive style, we will clearly communicate this with you.
Thank You for Trusting Us
From all of us here at ClearPath Financial we are humbled by your faith and trust in us. While we are not perfect, we are continuously trying to getter better in all facets of our business. Excellence is truly a standard we are reaching for. Have an awesome July. As always, if you need anything, please don’t hesitate to reach out to us.
If there is anything you'd like to discuss please 'Reply' here to request a chat.
Matthew Sherman
Investment Advisor Representative
Disclosures
This commentary offers generalized research, not personalized investment advice. It is for informational purposes only and does not constitute a complete description of our investment services or performance. Nothing in this commentary should be interpreted to state or imply that past results are an indication of future investment returns. All investments involve risk and unless otherwise stated, are not guaranteed. Be sure to consult with an investment & tax professional before implementing any investment strategy.
Past performance is not indicative of future results. This material is not financial advice or an offer to sell any product. The information contained herein should not be considered a recommendation to purchase or sell any particular security. Forward looking statements cannot be guaranteed.
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.
The Nasdaq Composite Index measures all Nasdaq domestic and international based common type stocks listed on The Nasdaq Stock Market. To be eligible for inclusion in the Index, the security’s U.S. listing must be exclusively on The Nasdaq Stock Market (unless the security was dually listed on another U.S. market prior to January 1, 2004 and has continuously maintained such listing). The security types eligible for the Index include common stocks, ordinary shares, ADRs, shares of beneficial interest or limited partnership interests and tracking stocks. Security types not included in the Index are closed-end funds, convertible debentures, exchange traded funds, preferred stocks, rights, warrants, units and other derivative securities.
The Dow Jones Industrial Average® (The Dow®), is a price-weighted measure of 30 U.S. blue-chip companies. The index covers all industries except transportation and utilities.
The Russell 2000® Index measures the performance of the small-cap segment of the US equity universe. The Russell 2000® Index is a subset of the Russell 3000® Index representing approximately 10% of the total market capitalization of that index. It includes approximately 2,000 of the smallest securities based on a combination of their market cap and current index membership. The Russell 2000® is constructed to provide a comprehensive and unbiased small-cap barometer and is completely reconstituted annually to ensure larger stocks do not distort the performance and characteristics of the true small-cap opportunity set.
The MSCI EAFE Index is an equity index which captures large and mid-cap representation across 21 Developed Markets countries*around the world, excluding the US and Canada. With 902 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in each country.
The MSCI Emerging Markets Index captures large and mid-cap representation across 26 Emerging Markets (EM) countries*. With 1,387 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in each country.
The Bloomberg Barclays U.S. Aggregate Bond Index is a broad-based benchmark that measures the investment grade, U.S. dollar-denominated, fixed-rate taxable bond market. This includes Treasuries, government-related and corporate securities, mortgage-backed securities, asset-backed securities and collateralized mortgage-backed securities. ACA-2201-1.