Markets Brief: As the third quarter draws to a close, the stock market rebound has passed

With the end of the third quarter just days away, what looked like a turnaround quarter for markets turned sour for investors.

At one point in August, Morningstar’s U.S. Market Index had rebounded more than 18% from its mid-June lows, and bond yields began to fall on hopes that inflation was hitting a low. peak and that the Federal Reserve could ease its aggressive rate hikes.

But as it became clear inflation was much more rigid than most investors – and Fed officialshad expected, feeling soured. As Fed officials signaled last week, there are still plenty of rate hikes to come in the coming months.

This week may not bring much to change the near-term outlook, as the calendar is relatively light on major economic and corporate news. However, a key report will be released on Friday with the release of August data for the Fed’s favorite inflation indicator, the Personal Consumption Expenditures Price Index.

In July, the PCE inflation index posted a 12-month increase of 6.3%, compared to 6.8% in June. Economists expect the PCE index to post a 6.1% year-over-year rise in August, according to FactSet. A bad reading could further reinforce negative sentiment in bond and equity markets.

Although third quarter results are still not released for a few weeks, investors should also be wary of companies that release preliminary results.also known as advance announcementslike FedEx’s recent warning about slowing business due to economic headwinds.

Meanwhile, for investors who haven’t checked their portfolios recently, the third quarter itself doesn’t look so bad when measured from start to finish. As of Friday’s close, the Morningstar US Market Index was down 2% for the quarter.

But that masks the back and forth that the market has made over the past three months. By mid-August, stocks were up 18.4% from their June bear market low. If the market had made it a little higher and passed the 20% mark, it would have qualified for a new bull market.

This was not to be the case. Shares are now down 14.4% from that peak, and the US market index is down 22.8% so far in 2022. That leaves the index at just 1.3 % ahead of its June 16 bear market low.

The other bad news for investors is that bonds also continue to suffer losses. This means that traditional diversification strategies, such as a 60/40 split between stocks and bondsdon’t offer much refuge.

Given that the Fed has made it clear that it will take an economic slowdown to bring inflation under control, there is not much optimism to be had in the market.

“There’s no reason this (stock) market shouldn’t fall much more,” Richard Weiss, chief investment officer for multi-asset strategies at American Century Investments. “If history is any guide, the market could easily drop another 10% to 20%.”

Events scheduled for the coming week include:

  • Thursday: Bath in bed and beyond (BBBY)and Nike (NKE) report earnings.
  • Friday: August update of the personal consumption expenditure price index.

For the trading week ended September 23:

  • The Morningstar US Market Index fell 4.97%.
  • All sectors fell over the week, with Energy down 9.38% and Consumer Discretionary down 7.43% the worst performers.
  • Yields on the 10-year US Treasury rose from 3.45% to 3.69%.
  • West Texas Intermediate crude oil prices fell 7.48% to $78.74 a barrel.
  • Of the 851 U.S.-listed companies covered by Morningstar, 35, or 4%, were up and 816, or 96%, were down.

Which stocks are rising?

Packaged food inventories edged up on gains at General Mills (GIS) after the company announced first-quarter results that showed organic sales growing 10%.

“We believe the business is also benefiting from consumers’ shift to home food consumption to help combat inflation, based on management feedback and restaurant traffic data, which has eased in recent years. month,” said Rebecca Scheuneman, senior equity analyst at Morningstar.

The company also raised its organic sales forecast for fiscal 2023 to 5% to 6% from 4% to 5%. Kellogg competitors (K)Simply good food (SMPL)Campbell’s Soup (CPB)and JM Smucker (SJM) saw their shares close higher.

Line chart showing some of the best performing stocks during the week of September 23, 2022.

Which stocks are down?

Cyclical stocks fell as the Fed’s latest rate hike coupled with comments from Chairman Jerome Powell pushed expectations of a recession higher.

In response, investors sold shares of retailers including The RealReal (REAL)Farfetch (FTCH)and Wayfair (W).

Renewable energy companies also fell after the Fed meeting, continuing their volatility of recent weeks. Among those in the sector, the biggest decliners were high-growth companies that have yet to be profitable, such as ChargePoint. (CHPT) and connect the power (PLUG) .

“The impact of the rate hike is more severe [for them] since the cash flows are older,” says Morningstar equity analyst Brett Castelli.

Oil and gas companies also fell on lower natural gas and crude oil prices, with Antero Resources (RA) and Patterson-UTI Energy (PTEN) among the greatest declines.

Chart showing some of the worst performing stocks during the week of September 23, 2022

Comments are closed.