Market Update July 22, 2022
I hope you all have been able to enjoy the wonderful weather that we have been having while at the same time I hope that the farmers are getting enough moisture as the rains have been sporadic.
This past week saw the markets try to climb higher based on predictions that the worst of the recession is over with and the bet that interest rate increases won’t be as high and that rate cuts could come as soon as January. Other reasons for the 7% increase in the Nasdaq and 3% rise in the S&P500 was earnings of Fortune 500 companies this past week weren’t as bad as feared, there was a record amount of people investing short the market, which means they were betting against the market and had to cover their losses, it is called a short squeeze not to be mistaken with a polite hug. Another name that is used for rallies inside of bear markets is a “bear trap” meaning the bear market rally sets a trap for investors into thinking that they have to invest, also called FOMO or “Fear of Missing Out.” If the markets today hold the losses this may be one of those traps.
I believe we could safely say that this week was a bear market rally and not the start of something new and long lasting. Bear markets rarely end without capitulation that stems from fear and even though the markets have been down throughout 2022, most investors have held tough with the belief that things will get better like they always have, and maybe they will. But let us consider some facts.
There are more numbers and facts that you can shake a stick at, but I will attempt to name some of the bigger ones.
· Inflation in North America and Europe are at levels not seen in 40 years, 8% to 9%.
· To fight inflation Central Banks raise interest rates and Europe raised rates for the first time in 11 years ½% which brings their prime rate to 0.0%. Yes, you read that correctly, they have had negative interest rates for a decade or more.
· Higher interest rates are bad for both stocks and bonds.
· Real estate in major markets is dropping.
· Meanwhile bond yields continue to drop in Canada and the US as of late which might sound confusing when rates are supposed to be going up. But what is happening is institutions and retail investors are buying bonds as a safe haven rather than the stock market which makes their prices go up and their yields to drop. This shows a lack of confidence in the market.
· There is something called the PMI read which is a survey of supply chain managers. If the numbers come in at 50 it is an indicator that the economy is holding steady, but most countries are reporting below 50 with the world’s largest economy, the US, showing one of the largest drops from 52.7 to 47. This is what you call a contraction in those economies.
I could go on, but these are the highlights I came up with for today to illustrate that in my opinion, and the reading of our market indicators is that the risk of being invested in the market outweighs the potential return. A catalyst is required to move these markets higher and for the past 14 years the way that has happened is with lower interest rates and lots of printing of new money. In fact, the USA money supply went from 4 trillion in existence in 2020 to $21 trillion in 2022. Yes, once again, you read that correctly. Over 80% of the money in existence in the USA was printed in the past 2 years. And now that they have shut down the printing press, or so they tell us, there is no fresh cash to pump the market.
To conclude it feels like we are going to have a few more weeks, if not throughout August of boring markets that are relatively flat. I could be wrong but if you look back at history this is the case. If market conditions continue to deteriorate then September could be the month of truth.
I have been vocal and open that one day we will see a 1929 stock market crash. In fact, I have stated that 2008 should have been our 1929 but instead of spending trillions to take care of the people they gave it to the banks to bail them out after two of them went broke. And since 2008, as I previously pointed out, the governments and their bankers have been priming this market with free money to the point that they’ve got a decision. Either they continue to raise interest rates to stop inflation and they keep the printing presses shut down which protects their currency but likely causes the stock market to drop much further, or, they turn the printing presses back on allowing inflation to run higher causing their currency to crash. They have painted themselves in a corner of which there is no exit strategy that won’t hurt.
Yours in Faith, Family and Finance,