Wesley Chapel, FL

The S&P 500 finished August down 4.08% (using the SPY ETF as a proxy) for the month. That marks the fifth losing month of 2022. At one point, it was up almost 6% (on top of 9% in July) and plenty of folks (especially on CNBC and other financial TV) were declaring the bear market over!

And then prices of the index ran into their 200-day moving average (DMA) on August 16th. That was the second major “lower high” for the market this year. As long-time readers know, the 200-DMA is the long-term trend.

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SPY (S&P 500 Index Chart)
*SOURCE:* *Tradingview.com*

If the 200-DMA is rising and the current price is above that level, the market is in a long-term up-trend. If the 200-DMA is falling and the price is below that level, the market is in a long-term down-trend. The market failed to rise above its falling 200-DMA and so, we remain solidly in a long-term down-trend and stuck in a painful bear market.

Some analysts say that the long-term down-trend won’t end until the 200-DMA rises for 21 consecutive days. I had never heard of that specific rule before reading it somewhere this month, but it makes a lot of sense to me as a very conservative measure. You certainly won’t be “picking the bottom” if you wait for that signal – but you will very likely be safe to put capital back to work by then.

The most recent Elevate Market Chat recorded Thursday, September 8th.

So, the most recent “bear market rally” failed at the declining 200-DMA and dropped almost 5% before finding some support. (See the nearby chart of the SPY) This was pretty textbook behavior. Then, on the morning of Friday August 26th, Federal Reserve Chairman Jerome Powell delivered a speech from Jackson Hole, WY, which was extremely bearish for stocks and bonds. You can find the entire (short) speech by clicking here. It is just a few pages long which is abnormal. If you’d rather not read it that’s OK – I will share the 14 most important points he made below – none of which are bullish:

The Federal Open Market Committee’s (FOMC) overarching focus right now is to bring inflation back down to our 2 percent goal
The burdens of high inflation fall heaviest on those who are least able to bear them
Restoring price stability will take some time and requires using our tools forcefully to bring demand and supply into better balance. Reducing inflation is likely to require a sustained period of below-trend growth. Moreover, there will very likely be some softening of labor market conditions. While higher interest rates, slower growth, and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses. These are the unfortunate costs of reducing inflation. But a failure to restore price stability would mean far greater pain.
The U.S. economy is clearly slowing.
...a single month’s improvement falls far short of what the Committee will need to see before we are confident that inflation is moving down.
We are moving our policy stance purposefully to a level that will be sufficiently restrictive to return inflation to 2 percent... with inflation running far above 2 percent and the labor market extremely tight, estimates of longer-run neutral are not a place to stop or pause.
July’s increase in the target range was the second 75 basis point increase in as many meetings, and I said then that another unusually large increase could be appropriate at our next meeting.
Restoring price stability will likely require maintaining a restrictive policy stance for some time.
The historical record cautions strongly against prematurely loosening policy.
...central banks can and should take responsibility for delivering low and stable inflation. Our responsibility to deliver price stability is unconditional.
11. There is clearly a job to do in moderating demand to better align with supply. We are committed to doing that job.
The longer the current bout of high inflation continues, the greater the chance that expectations of higher inflation will become entrenched.... we must keep at it until the job is done.
The successful Volcker disinflation in the early 1980s followed multiple failed attempts to lower inflation over the previous 15 years. A lengthy period of very restrictive monetary policy was ultimately needed to stem the high inflation and start the process of getting inflation down to the low and stable levels that were the norm until the spring of last year. Our aim is to avoid that outcome by acting with resolve now.
We are taking forceful and rapid steps to moderate demand so that it comes into better alignment with supply, and to keep inflation expectations anchored. We will keep at it until we are confident the job is done.

Emphasis added by me with bold.

That is, without question, the most bearish speech I have ever heard from a FED Chairman in my career of managing portfolios. There is literally nothing to be bullish about in the entire speech.

Kyle and I talked through each of those 14 points during the first few minutes of a recent Elevate Market Chat which you can find on our YouTube channel if you click here. Be sure to like and subscribe so that you can stay up to date with my latest thinking on the markets. We record the chats on Thursday’s each week, and they are usually posted by Friday, although we do our best to get them posted the same day they are recorded.

“The reports of my death have been greatly exaggerated…”

Despite the calls of many talking heads, the bear market is not dead. And despite the misquoting by many authors, it turns out that (apparently) is not exactly what Mark Twain said… but the quote works here so I am using it!

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*SOURCE: JP Morgan Guide to the Markets*

As much as I’d like to write something different, my rule for these letters (and the motto for all we do at Elevate) is to tell you what I would want to know if our roles were reversed. So, here goes…

According to Hussman Funds:

“…the only bear market low in history that occurred in the midst of a Fed tightening cycle was in 1987, at an S&P 500 forward operating P/E of less than 10, and a price/revenue multiple less than a quarter of today’s level.”

According to GMO Research:

“Only a few market events in an investor’s career really matter, and among the most important of all are superbubbles. These superbubbles are events unlike any others: while there are only a few in history for investors to study, they have clear features in common. One of those features is the bear market rally after the initial derating stage of the decline but before the economy has clearly begun to deteriorate, as it always has when superbubbles burst. This in all three previous cases recovered over half the market’s initial losses, luring unwary investors back just in time for the market to turn down again, only more viciously, and the economy to weaken. This summer’s rally has so far perfectly fit the pattern.”

Sound familiar?

Another analyst I follow at Stansberry Research recalled a bear market rally back in 2001 this way…

"You don't sit back, sip an iced tea on a summer day, and fondly reflect on that time the Nasdaq rallied 43% in April and May 2001 (including a 9% jump in one day)... You remember the 78% loss in the benchmark S&P 500 from the dot-com bubble peak in March 2000 to its ultimate bottom in October 2002."

Stocks were up 43% and still turned out to be in a bear market…

Then there is Nick Reece, CFA, at Merk Investments who recently shared this:

“Bear markets tend to be back-end loaded, with the largest declines coming in the last third (of time duration) 11 out of 16 times, with the average decline in the last third double that of the 1st or 2nd third. Of course, we don't know duration ex-ante.”

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*SOURCE:* *tradingeconomics.com*

And that brings me to today. Yesterday morning, the Bureau of Labor Statistics (BLS) reported the Consumer Price Index (CPI) for the month of August. While it came in a little lower for the full year than last month’s reading of 8.5%. The 8.3% reading was slightly higher than the expectation of 8.1%.

What is worse is that the “core” CPI measure which excludes Food and Energy came in a little higher for the full year than last month’s reading of 5.9%, at 6.3%. The monthly increase from July to August also showed signs of acceleration with a rise of 0.6% for the month compared to only a 0.3% rise in July from June.

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The “sticky” items like Shelter, Restaurants, Hotels and Transportation alone are causing CPI to be higher than 4% - which is double the FED’s target of 2%. So, even if Food and Energy showed 0% inflation (which they don’t) we’d ***still*** be well above the FED’s 2% target.
*SOURE: JP Morgan Guide to the Markets*

The acceleration in the monthly number was largely due to big increases in medical care, shelter, and home furnishings.

This report gives the FED permission to hike rates again at their upcoming policy meeting which concludes next week on Wednesday September 21st. I expect them to hike by another 0.75% taking the overnight lending rate above 3% for the first time since 2008. They might even do more than 0.75% and hike by a full 1%.

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Bonds are basically having their worst year **ever**… I wouldn’t want to be invested in a 60/40 stock/bond portfolio.
*SOURCE: JP Morgan Guide to the Markets*

Again, just go back to the 14-point list that I started with and note the stated commitment to achieving price stability.

Higher rates are great for savers, but bad for stocks and worse for bonds.

So, we have a fundamentally bearish picture alongside a market that is in a technical long-term down-trend.

This is still not the time to be aggressively buying stocks.

Until the market can make a higher high, a series of higher lows, break and hold above its 200-DMA, or some combination of those factors I will remain bearish. I think it is possible, if not probable, that the low for the year still has not been achieved.

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Energy stocks are still cheap and they are up big for the year (especially compared to everything else). This is a good place to stay long (we have owned XLE in both our strategies for 551 days and counting) and maybe even look for new positions.
*SOURCE: JP Morgan Guide to the Markets*

Why doesn’t that lead me to going 100% cash? Well, I could be wrong. I often am wrong. Knowing this, wisdom says to hold onto our best long positions until they stop out. That same wisdom also says to add some new positions along the way always keeping focus on the risk/reward arithmetic. The key is to lose a little when you are wrong and make a lot when you are right. And there is no need to get aggressive buying stocks just because they are down big. They can always go down more.

Yesterday, the market had its worst day of the year with the S&P 500 Index (SPY) falling 4.35% and the Nasdaq 100 (QQQ) falling 5.48%. The last time (and only other time this year) that QQQ fell by 5%, it dropped another 10% over the subsequent 10 trading days.

Stocks in the Nasdaq tend react worse to rising interest rates because they borrow relatively more to finance continued growth compared to the S&P 500. Even Apple (AAPL) was down big yesterday, -5.87%.

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Mortgage Rates are the highest they have been since 2008.
*SOURCE:* *Freddy Mac*

While the Elevate Strategies are not immune to these drops, we do have our stops in place (as I discussed at length in my last commentary) so our downside is somewhat limited by that, and we have continued to hold substantially more cash than normal across all our strategies. We did put some capital back to work using partial position sizes during the recent bear market rally, but our average cash position is approximately 40%. And we still have room to add to those new positions if they hold above their stop levels.

There is so much more that I would like to discuss during this time of high volatility, but I am already severely late in getting this commentary out and there is still a whole round of editing and posting and emailing and such that must be done before anyone will get to read this. The more I write, the longer that will take.

So, I apologize for what may feel like a short commentary with lack of detail this month. I encourage you to click on each of the links that I have shared here and read those pieces. They are very good. I also hope that you’ll click the images and read their captions that I have shared and that you’ll check out our recent and future Elevate Market Chat videos on our YouTube channel. We will have a new one of those posted later this week, God willing.

Clients, I encourage you to click here to access your personalized performance portal to see how your portfolio performed in August.

Until next time, I thank God for each of you, and I thank each of you for reading this commentary.

Shane Fleury, CFA
Chief Investment Officer
Elevate Capital Advisor

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