Short Term Rally Loses Momentum
What is it?
Stocks were mostly up in recent weeks before the U.S. Federal Reserve meeting last week.
“U.S. stocks tumbled Thursday as Wall Street reeled from another sizable rate hike by Federal Reserve officials and assessed similar moves by monetary policymakers across the Atlantic. The European Central Bank and the Bank of England followed the U.S. Fed in raising interest rates by 50 basis points Thursday morning. The BoE’s hike brought rates in the country to their highest since 2008. Indications from each of the banks that further tightening is underway offset optimism over peaking inflation.”*
Below is a visual representation made using TradingView of the loss in momentum. It is a daily chart (each candle represents one trading day) that covers nearly the last six months of the Vanguard Total World Stock Index ETF (VT). The short term positive trend line was broken through as shown by the arrow.
Why does it matter?
We believe this break may continue lower if economic conditions continue to tighten.
“The moves Thursday morning follow declines across the major averages in the previous trading session after the Fed delivered a 50-basis-point increase to its benchmark interest rate. Fed Chair Powell also emphasized that he and colleagues will continue to lift rates in 2023. The S&P 500 slid 2.5%, while the Dow Jones Industrial Average shed more than 2.3%, logging its worst day in three months. The technology-heavy Nasdaq Composite dropped 3.2%.”*
While things have held up over recent months, we believe that investors may be looking at other indicators of a recession and adjusting their portfolios accordingly.
Past Retail Sales Underperform
What is it?
Many investors track retail sales to gauge trends in consumer spending. If consumers are limiting their spending, then companies may have lower expected earnings which would negatively impact stock prices.
“The U.S. government’s retail sales report showed spending fell sharply in November as the key holiday shopping season kicked off. The latest retail sales reading showed a decline of 0.6% over the prior month but a 6.5% increase from the same period last year.”*
That 6.5% increase from the prior year is not that great considering inflation was recently measured over 7%.
“’Black Friday and holiday shopping weren’t enough to save retail sales last month as they decreased the most this year and came in well below expectations,’ Morgan Stanley’s Head of Model Portfolio Construction Mike Loewengart said in a note. ’The consumer has been resilient amid hot inflation and rising rates, but high prices and talks of a recession may have some now second guessing reaching for their wallet,’ he added.”*
Why does it matter?
While this data is a lagging indicator (based on past data) it is used to help predict expected earnings in the future. If the downward trend continues, stock prices may move in the same direction. Another aspect to this is that as more companies plan for the future, massive lay-offs could continue. While this retail sales data is not a key factor in our analysis, it does provide insight to how the economy is changing. We value change since it can confirm or deny our positioning in the markets. This is one measure that confirms our current risk-off positioning for stocks.
Other articles we found interesting this week:
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Our last portfolio reallocation: 5/19/2022.
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The weekly market insight provides a window into the process we use in our investment management process. At Breakaway, we believe markets are always changing and require a nimble yet data-oriented approach.
Our process attempts to identify trends and momentum in the financial markets. With that information, we align our clients’ portfolio accordingly in the hope to help our clients accomplish their life goals while attempting to lower the risk of a large drop in their portfolio.
*Alexandra Semenova. “Stocks plunge after rate hikes, weak retail sales rattle markets”. 12/15/2022. Yahoo Finance. https://finance.yahoo.com/news/stock-market-news-live-updates-december-15-2022-114938982.html
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