October 20, 2022 – This morning, U.K. PM Truss resigned after less than a month in office, deepening the political and fiscal debacle in the U.K.—a debacle that pressured U.S. stocks to fresh lows less than a week ago!
But it’s not just what’s happening in the U.K. that’s adding to this confusing market. Consider the following critical market questions:
Is inflation peaking (the market thought so), or not?
Are earnings rolling over (the market thought so), or not?
Is a recession imminent (the market thought so), or not?
Each of these issues are contributing to increased market volatility and a very muddled outlook for both stocks and bonds.
On top off all that, we are now less than a month away from Election Day here in the U.S., where we could potentially see Republicans take control of the House and/or Senate. If that happens, it will become another influence on markets we have to pay attention to (remember the government shutdown dramas of the early 2010s?).
Finally, there is still a war raging in Ukraine, an energy crisis in Europe, and rolling, seemingly never-ending COVID restrictions in China.
I won’t say this is the most difficult market I’ve had to navigate (the financial crisis still ranks #1 in my career) but the sheer number of shifting influences on stocks is extremely high, and it is making it very to explain the current market set up, articulate opportunities and risks, and communicate why a sound financial plan can weather this volatility.
With so many different macroeconomic headwinds converging in one year, it is important to sort through all the noises and focus on the more important economic catalysts to help understand where the market is heading and what to expect. Accordingly, I have included a Market Multiple Table from our research analysts listing the more important market influences to watch, and how they may impact the market.
The one silver lining in the October MMT is important: The risk/ reward is skewed higher for stocks, as long as things don’t get materially worse. Consider: If the “Gets Worse If” scenario occurs, and the S&P 500 retraces all of the pandemic gains, we’re looking at less than a 10% decline from here. Conversely, if there is any positive news on the Fed or inflation, a rally of 10% could easily occur, and if there’s actual real improvement across macro fundamentals, then a 20% rally isn’t out of the question, either. Of course, there remain numerous downside risks, but around 3,600 the S&P 500 has priced in a lot of bad news, and the rally from a positive surprise is likely to be much more powerful than the additional decline from more bad news (barring a nuclear war or some such event) and that’s at least a silver lining amidst an otherwise grim outlook.
Where Could the S&P 500 Bottom?
By John Lau
October 20, 2022 – This morning, U.K. PM Truss resigned after less than a month in office, deepening the political and fiscal debacle in the U.K.—a debacle that pressured U.S. stocks to fresh lows less than a week ago!
But it’s not just what’s happening in the U.K. that’s adding to this confusing market. Consider the following critical market questions:
Each of these issues are contributing to increased market volatility and a very muddled outlook for both stocks and bonds.
On top off all that, we are now less than a month away from Election Day here in the U.S., where we could potentially see Republicans take control of the House and/or Senate. If that happens, it will become another influence on markets we have to pay attention to (remember the government shutdown dramas of the early 2010s?).
Finally, there is still a war raging in Ukraine, an energy crisis in Europe, and rolling, seemingly never-ending COVID restrictions in China.
I won’t say this is the most difficult market I’ve had to navigate (the financial crisis still ranks #1 in my career) but the sheer number of shifting influences on stocks is extremely high, and it is making it very to explain the current market set up, articulate opportunities and risks, and communicate why a sound financial plan can weather this volatility.
With so many different macroeconomic headwinds converging in one year, it is important to sort through all the noises and focus on the more important economic catalysts to help understand where the market is heading and what to expect. Accordingly, I have included a Market Multiple Table from our research analysts listing the more important market influences to watch, and how they may impact the market.
The one silver lining in the October MMT is important: The risk/ reward is skewed higher for stocks, as long as things don’t get materially worse. Consider: If the “Gets Worse If” scenario occurs, and the S&P 500 retraces all of the pandemic gains, we’re looking at less than a 10% decline from here. Conversely, if there is any positive news on the Fed or inflation, a rally of 10% could easily occur, and if there’s actual real improvement across macro fundamentals, then a 20% rally isn’t out of the question, either. Of course, there remain numerous downside risks, but around 3,600 the S&P 500 has priced in a lot of bad news, and the rally from a positive surprise is likely to be much more powerful than the additional decline from more bad news (barring a nuclear war or some such event) and that’s at least a silver lining amidst an otherwise grim outlook.
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