July marks a welcomed end to what was a humbling first half of the year for investors. “The worst first half for the market in 50 years”, “Inflation highest level since late 1981”, “Fed hikes rates 75bps; biggest jump since 1994”…the market made headlines for all the wrong reasons.
The heavily followed S&P 500 dropped 20.6%.
The tech heavy Nasdaq has declined 29.4%.
The Dow Jones Industrial Average was down 15.3%.
Even more conservative investors that seek the perceived consistency of bonds felt the discomfort as rising interest rates adversely affected their bond values. All the major bond benchmarks have declined throughout the year. Bonds of the highest quality are of no exception as the S&P 500 Investment Grade Corporate Bond Index was down 13.05% for the first half of the year.
Although it certainly feels unsettling listening to salacious factoids and witnessing short periods of extreme market volatility, it is unfortunately the correct path back to some sense of economic normalcy. It’s been over two years of global governments and central banks intervening due to COVID. It’s going to take longer than six months for the market to absorb all the unintended consequences of those actions. The road to normalcy will continue to be bumpy, but we are already on our way and the way is filled with opportunities. Don’t fall prey to comparisons of the financial crises or even stagflation of decades past. Our current situation, although challenging, is a far cry from those periods of deep economic hardship.
Jerome Powell – Bye Bye punchbowl at the after party
We all know the destructive effects of inflation and have heard at nauseam about how much everything has gone up in price. Going into the Fourth of July holiday, it seemed like every news cast wanted to remind us how much more that backyard barbecue was going to cost. In case you’re wondering, Wells Fargo even put together a Fourth of July Food Inflation Report and it’s up approximately 11% this year. Lucky for me, I’m Canadian, but don’t get me started on the price of maple syrup and poutine. Back to the point, there’s a long list of reasons contributing to our current high inflation woes…China lockdowns, government stimulus, low interest rates, asset buying from central banks, war in Ukraine, etc. But it’s Fed Chairman Jerome Powell that’s taken the brunt of the blame (undeserving in my opinion) and he’s taken it upon himself to tame inflation. He vowed that policymakers would not allow inflation to take hold of the economy over the long term and with his 75 basis-point increase in June, he proved his bark has bite. The bond market is already reacting with a vote of confidence. The one-year breakeven Treasury Inflation-Protected Securities (TIPS), a bond used to gauge future market inflation expectation, is down to approximately 4% from a high of over 6%. Following suit is the U.S. 10-year Treasury yield which has dropped from a peak of 3.5% to approximately 2.9%. It’s a clear signal that the bond market thinks we’re past peak inflation and the Fed is serious about inflation. What’s unclear for now is just how hard or soft the Fed can land the economy. It seems like the markets are currently in sync with Powell’s messaging and have already accomplished much of the heavy lifting needed to control inflation expectations. Commodities have also reacted to the Fed’s raising rates and potential recession fears. The easing of inputs like energy will definitely be a welcomed reprieve and a helpful turnaround for consumers’ confidence levels which already stand at decade lows.
Inside Buying – Opportunity knocks
With so much doom and gloom out there, you must keep reminding yourself it always pays in the long run to see through the pessimism and seek out opportunity. It’s there hidden under the pile of doubt and economic noise. One signal that could be on to something is when you discover large levels of buying by corporate insiders. These are the decision makers and the ones with clear view of their company’s current situations. Recently, we have seen the insider buy-to-sell ratio at its highest monthly level since the March lows in 2020. Although it’s not a clear signal that the market has bottomed, it does present an optimistic view that CEO’s and executives believe their companies are being undervalued by the market. Here’s a few notable companies I own that have seen top executives buying up their own stocks recently:
Starbucks – Recently reinstated CEO Howard Schultz himself purchases $15 million of shares.
Uber Technologies – CEO Dara Khosrowshahi scooped up over $5 million of shares.
Six Flags Entertainment – Director Arik Ruchim purchased $15.96 million of shares.
