New Lows for 2022

The bear market of 2022 made new lows on the year this week as the market re-prices to quantitative tightening where market multiples contract and growth looks challenged. The effects of inflation are also showing up in profit margins of retailers as they have been unable to pass-through cost increases which ultimately may affect sales in the coming quarters as consumers save for essentials like food and gas.

No Place To Go

I see some economists and investors make projections on Fed policy and the typical thought is that interest rate increases will lead to a recession and then we are back to a dovish policy. The Fed did reverse a hawkish policy in 2018 only to reverse themselves a few months later. However, this was a voluntary attempt at normalizing policy that failed when the high-yield bond market couldn’t issue bonds anymore so the Fed reversed course. In this environment, inflation has painted them into a corner and the oversupply of pandemic stimulus leaves them little choice but to stay the hawkish course.

If you look at the chart to the right you can see the byproduct of trillions of stimulus provided by central banks across the globe due to the pandemic. Eventually, inflation rears its ugly head but this time it is uniform across the major economies. Not in the chart is Japan which printed a 2% CPI number – the highest since 2008.

What this means is that central bank policies will converge to quantitative tightening to combat inflation. This process is just getting started as the Fed’s balance sheet reduction does not get going in earnest until the Fall and the EuroZone has yet to begin its program. So, this process looks like it will take years to play out as central banks will not be acting in unison until later this year.

The Stock Market

One step at a time when it comes to the equity market. This week the S&P finally tapped the 38.2% retracement and we got a nice rally into the close which was related to options expiration on Friday. This rally could carry into next week but I think we eventually work lower on this chart as more central banks come on-line with their tightening policies. The technicals show an oversold condition now exists but a sharp reversal is needed soon to stop the downside momentum.

Chart of the Week!


Economic & Central Banking Snippets 

  • US industrial production rose in April by 1.1% compared to March with manufacturing production and utility output leading the way. Auto production was a standout and Capacity Utilization rose to 79% from 78.2% which was the highest read since December of 2018.
  • The May Philadelphia Fed manufacturing survey saw a drop to 2.6 from 17.6 and that is the weakest read since May of 2020. Prices paid and received remain above their 6 month averages while business outlook fell to 2.5 from 8.2 which is the lowest since December 2008. Also, capital spending plans dropped below the March 2020 Covid low of 12.
  • The NAHB home builder sentiment index fell to the lowest level since June 2020 as all components saw sharp declines over the last month. The NAHB Chairman said, “Housing leads the business cycle and housing is slowing.” Its chief economist added, “Building material costs are up 19% from a year ago, in less than three months mortgage rates have surged to a 12 yr high and based on current affordability conditions, less than 50% of new and existing home sales are affordable for a typical family. Entry level and first time home buyers are especially bearing the brunt of this rapid rise in mortgage rates.”
  • Japan’s April CPI ex food rose 2.1% compared to last year which is the first time since September 2008 that inflation is above 2%.
Paul J. McCarthy III

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Paul J. McCarthy, III

President – Kisco Capital

Paul McCarthy

Mr. McCarthy is the President and founder of Kisco Capital.