@theMarket: Moving Forward After Tumultuous Stock Market Week

Stocks have made new yearly lows this week as fears of declining corporate earnings, higher interest rates, and a climbing dollar sent investors running for the hills. As we enter October, another relief rally may be in the offing.

 

This week, the countertrend bounce I predicted in the early part of the week happened on Wednesday. It was triggered by events in the United Kingdom. A sell-off in the Gilts (bond) market over there had reached such epic proportions this week that the Bank of England stepped into calm markets. The UK bond market rallied a record 5.6 percent and the global markets rallied with it. The U.S markets bounced as well with the S&P 500 Index gaining more than 2 percent, while the NASDAQ leaped by more than 3 percent. However, it did not last long. Traders tore those gains apart on Thursday. The indexes retraced those gains and then some.

 

There are plenty of excuses for further downside. A key metric the Fed is watching, U.S. jobless claims, hit a five-month low this week. Investors have been hoping to see a softening of the labor market (and therefore consumer demand), but so far, not so good.

 

The Personal Consumption Expenditures price index (PCE), a key inflation variable that the Fed follows to gauge the impact of their actions to fight inflation, came in slightly hotter than expected the following day. The month over month gain was 0.6 percent versus 0.5 percent expected. The PCE data was negative, but not negative enough to drive markets much lower.

 

As readers know, I have been predicting a re-test of the year’s lows (and possibly lower) for this past week. Both forecasts have come to fruition.  However, the new lows have been relatively minor -- 3,610 on the S&P 500 Index (intraday) versus the June 2022 low of 3,666. Could we see something lower, like 3,550 or below? That’s a definite maybe.

 

I am already looking ahead, because that's what you read this column for, right? My thinking is once we form another temporary bottom for the year, we should see a rally. If we actually decline further into that 3,500 to 3,550 level on good volume, and then reverse higher, I will use that behavior to purchase stocks. If we continue higher, buy some more.

 

Bear market rallies, of which we have had several this year, can be powerful. The October-into-November time period could be an ideal time where we could see another such relief rally. Why?

 

The run-up into mid-term elections could be the excuse, since politicians on both sides use the elections to promise the world to voters. The economy, according to numerous polls, will be one of the leading election issues as inflation continues to hurt the consumer's pocketbook. In addition, recession risks, higher mortgage rates, and plenty of other unknowns are on the voters' minds.  

 

Politicians usually promise remedies for all these problems and then some if elected, without providing much in the way of how it could be done. Nonetheless, these promises can provide some hope, however misguided, that there are solutions just around the corner.

 

I also suspect that the U.S. dollar may be topping, and if it is (at least for a month or two) that could also help support equity markets and provide some relief in stemming the continued climb in interest rates. That doesn't mean the dollar will have a major break down, but it could usher in a period of consolidation.

 

If I am correct, a declining dollar would have more impact on certain stores of value that are leveraged to a weaker greenback. Gold, silver, mines and metals, crypto and energy, in my opinion, would outperform most other assets. Overall, equities would gain, but not at the pace of the sectors I have identified.

 

Bill Schmick is the founding partner of Onota Partners, Inc., in the Berkshires. His forecasts and opinions are purely his own and do not necessarily represent the views of Onota Partners Inc. (OPI). None of his commentary is or should be considered investment advice. Direct your inquiries to Bill at 1-413-347-2401 or email him at bill@schmicksretiredinvestor.com.