Stocks Commentary
Previous

Central Bankers, Currencies, And Calendar Unkind

September 2022

September has historically been a challenging month for equity investors. The S&P 500 has generated an average monthly loss of 1% during the month since 1928 and September also has the distinction of being the only calendar month in which the S&P 500 has closed with a loss more times than it has ended with a gain over that time frame. While the S&P 500’s bounce from mid-June into mid-August was welcome, there was a give back of gains into month-end and this month could be poised to live up to its historical billing. September has proven to be a pitfall-ridden spot in the calendar and may prove to be so again due to tightening monetary policy, a strong U.S. dollar, and negative seasonality effects magnified by equity weakness in late August.

The S&P 500 traded at 18.2 times expected 2022 earnings and 16.8 times projected 2023 earnings as September began after rallying from mid-June into the Fed’s Jackson Hole symposium in late August. Equity valuations now appear ‘full’ given our expectation that the Federal Open Market Committee (FOMC) will stay on course and tighten monetary policy into a weakening U.S. economy as it attempts to decrease demand to match limited supply. Global economic growth should slow due to tighter monetary policy and geopolitical unrest, and we expect U.S. dollar strength to persist, all headwinds for U.S. multinationals. Companies in the S&P 500 may be challenged by a ‘stronger for longer’ U.S. dollar, but our bias toward quality, profitable, free cash flow generating companies returning capital to shareholders leads us back to that index as a port in the storm. Domestic small and mid-cap (SMid) stocks could fare relatively well as beneficiaries of a stronger dollar and have minimal exposure to weaker economies abroad. However, higher interest rates and widening credit spreads will act as hurdles, leaving us with a neutral allocation to SMid as a result.

Commodity prices rolled over in mid-June, leading to optimism surrounding the path forward for equities as, in theory, the FOMC would have the cover to make a dovish pivot in the back-half of ‘22. FOMC Chair Jerome Powell dashed hopes of such a policy shift at Jackson Hole in late August, spurring a sell-off in equities. However, despite rising recession fears, West Texas Intermediate (WTI) crude oil and natural gas prices held up as supply fears dominated. Recession probabilities rising acts as a headwind for commodity prices due to lower projected demand but will be offset to some degree by geopolitical uncertainty. OPEC announced a symbolic 100k barrel per day supply ‘cut’ in early September, showing a commitment to support prices, while civil unrest in Iraq/Libya and talks between the U.S. and Iran stalling could lead to ongoing supply worries and price volatility. Fears of commodity shortages should persist alongside geopolitical uncertainty, a backdrop that leads us to a constructive outlook on real assets and companies levered to sustained higher prices for energy and agricultural commodities.

Higher energy and electricity prices are weighing on the euro area and are likely to lead to economic pain throughout the balance of this year and well into 2023 as businesses close and unemployment rises. These issues could be compounded by the European Central bank (ECB) entertaining the idea of a 75-basis point hike to key deposit rates later this month as Eurozone inflation data remains worrisome. As the energy/electricity situation remains tenuous, government support/bailouts appear to be a likely path forward, which is an expensive short-term solution likely to generate additional weakness in the euro. The European Union (EU) could still balk at following through on harsh sanctions against Russia to get the natural gas spigot turned back on, avoiding the worst-case scenario, but Russia would likely only do so with ‘expensive’ stipulations. In-fighting and political dysfunction are the norm in Europe, and an underweight to international - developed market stocks is warranted as a rough winter likely lies ahead for Europe’s economy and Eurozone equities.

A skew toward the U.S. within equity portfolios will likely be rewarded over coming quarters as developed and emerging markets abroad face even more substantial headwinds, with few easy fixes. Europe’s struggles have been well documented, but Japan is dealing with yields on Japanese Government Bonds sitting at uncomfortably high levels for the Bank of Japan (BoJ), forcing them to print yen to buy bonds as they implement yield curve control. Rolling lockdowns continue in China, pressuring global supply chains and pushing prices for goods higher, weighing on consumer confidence and contributing to a sense of global economic angst. The wall of worry global equities are scaling is likely to grow taller leading up to mid-term elections in the U.S. and a defensive posture remains warranted.

Source: Bloomberg, Factset

Next

The content and any portion of this newsletter is for personal use only and may not be reprinted, sold or redistributed without the written consent of Regions Bank. Regions, the Regions logo and other Regions marks are trademarks of Regions Bank. The names and marks of other companies or their services or products may be the trademarks of their owners and are used only to identify such companies or their services or products and not to indicate endorsement or sponsorship of Regions or its services or products. The information and material contained herein is provided solely for general information purposes. Regions does not make any warranty or representation relating to the accuracy, completeness, or timeliness of any information contained in the newsletter and shall not be liable for any damages of any kind relating to such information nor as to the legal, regulatory, financial or tax implications of the matters referred herein. This material is not intended to be investment advice nor is this information intended as an offer or solicitation for the purchase or sale of any security or other financial instrument. Any opinions expressed herein are given in good faith, are subject to change without notice, and are only current as of the stated date of their issue. Regions Wealth Management is a business group within Regions Bank that provides investment, administrative and trustee services to customers of Regions Bank.

Neither Regions Bank nor Regions Institutional Services (collectively, “Regions”) are registered municipal advisors nor provide advice to municipal entities or obligated persons with respect to municipal financial products or the issuance of municipal securities (including regarding the structure, timing, terms and similar matters concerning municipal financial products or municipal securities issuances) or engage in the solicitation of municipal entities or obligated persons for such services. With respect to this presentation and any other information, materials or communications provided by Regions, (a) Regions is not recommending an action to any municipal entity or obligated person, (b) Regions is not acting as an advisor to any municipal entity or obligated person and does not owe a fiduciary duty pursuant to Section 15B of the Securities Exchange Act of 1934 to any municipal entity or obligated person with respect to such presentation, information, materials or communications, (c) Regions is acting for its own interests, and (d) you should discuss this presentation and any such other information, materials or communications with any and all internal and external advisors and experts that you deem appropriate before acting on this presentation or any such other information, materials or communications.

Employees of Regions Asset Management may have positions in securities or their derivatives that may be mentioned in this report or in their personal accounts. Additionally, affiliated companies may hold positions in the mentioned companies in their portfolios or strategies. The companies mentioned specifically are sample companies, noted for illustrative purposes only. The mention of the companies should not be construed as a recommendation to buy, hold or sell positions in your investment portfolio.

This communication is provided for educational and general marketing purposes only and should not be construed as a recommendation or suggestion as to the advisability of acquiring, holding or disposing of a particular investment, nor should it be construed as a suggestion or indication that the particular investment or investment course of action described herein is appropriate for any specific retirement investor. In providing this communication, Regions is not undertaking to provide impartial investment advice or to give advice in a fiduciary capacity.