Short on the markets: As the third quarter turns down, the stock market rebound is history

Within days of the end of the third quarter, what looked like a turnaround quarter for the markets took a turn for the worse for investors.

At one point in August, the Morningstar US Market Index had rebounded more than 18% from its mid-June lows and bond yields began to decline in hopes that inflation was peaking and that the Federal Reserve might cool. its aggressive rate hikes.

But when it became clear that inflation was much stickier than most investors and Fed officialshe expected, the feeling soured. As Fed officials reported last week, there is still a lot more in the way of rate hikes in the coming months.

This week may not bring much to change the near-term outlook, with the relatively light calendar on major business and business news. However, a key report will arrive on Friday with the release of August data for the Fed’s preferred inflation indicator, the Consumer Spending Price Index.

In July, the PCE inflation index posted a 12-month increase of 6.3%, down from 6.8% in June. Economists expect the PCE index to register a 6.1% yoy increase for August, according to FactSet. A misreading could further consolidate negative sentiment in both the bond and equity markets.

While third quarter earnings won’t be out for a few weeks yet, investors will also need to be on the lookout for companies coming out with preliminary earnings releases.also known as announcementssuch as FedEx’s recent warning about a slowdown in business due to headwinds in the economy.

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

But this masks the round trip the market has made over the past three months. In mid-August, stocks were up 18.4% from their June low. If the market had made it just a little higher and crossed the 20% mark, that would have qualified for a new bull market.

It didn’t have to be that way. Shares are now down 14.4% from that high and the US market index has dropped 22.8% so far in 2022. That leaves the index just 1.3% higher than the market low. bearish of June 16.

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

Given that the Fed has made it clear that it will take an economic slowdown to keep inflation in check, there is not much optimism in the market.

“There’s no reason this (equity) market can’t go down further,” Richard Weiss, American Century Investments chief investment officer for multi-asset strategies. “If history is any guide, the market could easily drop from 10% to 20%.”

Events scheduled for next week include:

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

For the trading week ended in September. 23:

  • The Morningstar US Market Index fell 4.97%.
  • All sectors fell for the week, with energy down 9.38% and cyclical consumption down 7.43%, the worst performers.
  • US 10-year Treasury yields rose to 3.69% from 3.45%.
  • West Texas Intermediate crude oil prices fell 7.48% to $ 78.74 a barrel.
  • Of the 851 listed companies in the United States covered by Morningstar, 35, or 4%, were up and 816, or 96%, were down.

What stocks are on the rise?

Stocks of packaged food rose slightly, driven by General Mills’ earnings (MR) after the company reported first quarter results which showed organic sales up 10%.

“We believe the company is also benefiting from consumers switching to eating food at home to help fight inflation, according to management comments and restaurant traffic data, which has eased in recent months,” says Rebecca. Scheuneman, Senior Analyst at Morningstar.

The company also raised its organic sales forecast for fiscal year 2023 from 5% to 6% from 4% to 5%. Kellogg .Competitors (K)Simply Good Foods (SMPL)Campbell 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.

What stocks are down?

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

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

Renewable energy companies also declined after the Fed meeting, continuing their volatility of recent weeks. Among those in the declining industry are high-growth companies that have yet to become profitable, such as ChargePoint (CHPT) and connect the power (PLUG) .

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

Oil and gas companies also fell due to falling natural gas and crude oil prices, with Antero Resources (AR) and Patterson-UTI Energy (PTEN) among the major decliners.

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

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