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Sept 2022 Recap: Is the Carnage Over yet?

Sept 2022 Recap: Is the Carnage Over yet?

| October 01, 2022

U.S. stocks delivered their worst monthly performance since the start of the pandemic sell-off in March 2020. The S&P 500 nosedived in September losing -9.3% for the month and -24.36% year to date as stock investors continued to be battered by rising interest rates and deepening worries about recession. Battling inflation is proving to be quite the challenge for the Federal Reserve and despite hope that smaller rate hikes were coming, Chairman Powell has been uncompromising in his strategy for quashing rising prices. 

As we enter October, there are risks of more downside in the short-term as central banks remain hawkish, recession risks are rising, investor confidence is at historic lows and earnings expectations continue to revise downward. At this point, many investors are wonderings if it is even feasible for a 4th quarter rebound. While I carry the same concerns, my personal view is that we still reasons to remain positive as we get ready to close out 2022.

First off, the primary market issue remains the aggressive monetary tightening policy by the Federal Reserve, specifically interest rate hikes. If we can witness disinflation over consecutive months, there is a good chance the Fed will begin to realize their objective and as a result, slow the rate hikes.

Right now, most leading inflation indicators (home sales, gasoline/oil/natural gas prices, car prices, airfare, travel, meats/produce, etc.) have been falling since the start of the summer. Unfortunately, the monthly CPI reports are not reflecting that change yet because Consumer Price Index reports account for old data that doesn’t reflect the current environment. My expectation is that you will continue to see disinflation through the remainder of the year due to seasonal trends and soon, the CPI reports will show that. 

The second reason for optimism is current valuations. Stocks are oversold in a big way. For example, Wall Street earnings analysts lowered their third quarter earnings estimates more than normal over the past three months. The estimated earnings growth rate for all the companies in the S&P 500 index now stands at 2.9% but on June 30, third quarter earnings were forecast to be 9.8%! Because this growth rate has contracted, the new forward 12-month price-to-earnings multiple on the S&P 500 is now 15.4x. To put that into perspective, The 5-year average is 18.6x and a 10-year average of 17.1x. Needless to say, the market has overcorrected, and stocks are much cheaper than historical norms.

Lastly, from a seasonality standpoint, November is historically the best performing month or the year and December is the 3rd best. My expectations are that once the midterm election is behind us, you will see some reduced inflation numbers and renewed optimism that the rate hikes are coming to end that should buoy stock prices into the end of the year and beyond.