Market Downtrend Continues – Monday Morning Market Memo – October 3, 2022

Market Downtrend Continues – Monday Morning Market Memo – October 3, 2022

The Dow Jones Industrial Average fell over 500 points Friday, adding to its weekly loss, in another week where all three major averages posted sharp declines.  The Dow shed 2.9% to 28,726 – the NASDAQ Composite fell 2.7% to 10,576 – while the Standard & Poor’s 500 Index tumbled 2.9% for the week, closing at 3,586.  All three indices are at their lowest levels since 2020.


Factors behind last week’s decline include simple momentum trading, along with Personal Consumption Expenditure inflation data showing core consumer prices rose by .6% last month, more than Wall Street expected.  Investors took this as further evidence the Federal Reserve will remain aggressive in raising rates and tightening monetary policy to fight inflation.


Also confirming this narrative last week were comments from Fed Vice Chair Lael Brainard, who reiterated the Fed will keep rates elevated to combat inflation and stated the central bank is “committed to avoiding pulling back prematurely.”  So, the bear market remains intact, as market participants face headwinds not only from inflation and higher interest rates, but also from items including supply chain problems, geopolitical tumult, and concerns over corporate profits – with some major companies having recently lowered guidance.


We’ll get a complete look at corporate earnings in the upcoming weeks as another quarterly earnings season is about to begin.  For the third quarter of 2022, the estimated earnings growth rate for the Standard & Poor’s 500 is 2.9%, which if that is the actual growth rate for the quarter, it will mark the lowest earnings growth rate reported by the index since the third quarter of 2020 – according to data from FactSet.  Earnings results, and more importantly forward guidance, will likely play a key role in market direction.


Looking at market valuation (also according to FactSet): The forward 12-month P/E ratio for the S&P 500 is 15.4, this P/E ratio is below the 5-year average of 18.6 and below the 10-year average of 17.1.  Bulls (positive on the market) argue that current market valuations are a buy signal, while bears (negative on the market) argue that earnings are headed lower, and we should expect lower overall market valuations with a hawkish (restrictive) Federal Reserve and so much uncertainty in the world right now.


We continue to stress that bear markets, as painful as they are, are a normal and inherent part of stock market investing.  While past performance is certainly no guarantee of future results, we believe it is noteworthy that all previous bear markets have ended and been replaced by new Bull markets.  Additionally related to bear markets, we advocate for time in the market – as opposed to timing the market!


As always, please contact us with any questions or if you would like to set up a meeting.


All the best – Southport Station Financial Management, LLC