Stocks and bonds both declined for the third consecutive quarter, the longest streak in almost 50 years. The S&P 500 fell 5.3%, ten-year Treasury yields rose 85bps and two-year yields rose 130bps resulting in the most inverted yield curve in several decades. The dollar rose for the fifth straight quarter, increasing 7%, the largest quarterly gain in nearly 8 years. The big story for the quarter was the tightening of financial conditions driven by expectations of a more aggressive global rate hike cycle leading to increased fears of recession. A second overhang that will be watched in Q4 is the risk that earnings expectations may fall. By the end of the quarter, worries surfaced that tighter financial conditions could lead to liquidity or credit problems and a “break” in the system. Crude oil fell more than 20% and gold dropped nearly 8%. Best sectors were consumer discretionary (+4.4%) and energy (+2.4%); worst sectors were communication services (-12.7%) and REITS (-11.0%).
SAFETY GETTING SOLD
September certainly lived up to its horrid reputation, with the S&P down nearly -10% from start to finish to close the month below June’s important 3637 low. We don’t need to tell you how short-term oversold this market is by any traditional measure, but the message of an oversold market that can’t seem to rally is the more important takeaway. By mid-October, seasonality offers a breather (particularly in mid-term election years), but our suspicion remains that bounces are likely to remain capped below the 3900 area (and about 290 on the QQQ’s).
We continue to believe that the real threat to consensus positioning remains “at the top of the market.” The holdouts – AAPL and TSLA – have topped, and are likely to work lower. Traditional “safety” is also under pressure – while Staples and Utilities have maintained their relative advantage, the price charts have all broken (worst two sectors last week). It’s a little reminiscent of Fall 2008 when the “best charts” ultimately succumbed to the bear as well. The good news is this tends to play out later in a bear market’s progression than earlier.
Oil on the move up again
WTI crude prices (CL1:COM) rocketed up 4.7% to over $83.20 a barrel early Monday as OPEC+ considers cutting production by 1M bbl/day or more at the group's meeting this week. The move would help prop up declining oil prices, which have been on a steady descent since hitting more than $120/bbl in late June. It would also mark the cartel's second consecutive monthly cut - after it reduced production by 100K bbl/day in September - and the biggest since the early days of the pandemic.
Bigger picture: As gasoline prices in the U.S. soared to over $5 a gallon this summer, the Biden administration asked the Saudis and OPEC+ to pump more to bring down prices. The president also unleashed a record number of barrels from the Strategic Petroleum Reserve (SPR) to help put a lid on energy costs, and those efforts bore some fruit, especially when compounded with a slowing global economy. Growth worries are now everywhere, like in China, where COVID-19 lockdowns are hurting demand, as well as other economies that are suffering from consequences of rapidly rising rates and a surging U.S. dollar.
The big question is where do oil prices go after the elections? With the SPR approaching low levels that we have not seen for decades, President Biden's energy policy is not sustainable. We believe he will continue to add 1mm barrels a day from the SPR to the market through the election to try and keep energy prices low. However, if OPEC + cuts 1mm barrels a day in production now and if the US cuts supply from the SPR then there will be 2mm barrels a day less in supply for the world market. It is our opinion that demand destruction will not be as bad as most expect and this lack of supply will drive oil and gas prices higher. It is also our opinion that the US will need to refill its SPR because of its dangerously low levels. When that happens, it will be like a large pick up in demand and should further send oil prices higher.
The Fed is diligently trying to fight inflation and will put us in recession if need be. However, without a good energy policy, lowering inflation will be difficult because of the way society is so dependent on energy. Energy touches every facet of our lives and taking from the SPR was not a good idea instead of changing our policy and we believe Oil and Gas prices will add to inflation in the coming months.
Source: Bob Doll Crossmark, Seeking Alpha
Chart reflects price changes, not total return. Because it does not include dividends or splits, it should not be used to benchmark performance of specific investments. Data provided by Refinitiv.
Sincerely,
Fortem Financial
(760) 206-8500
team@fortemfin.com
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