November 2022
Market Update

By Jake Eggett

Fall is a transitional time of the year where autumn slides relentlessly towards winter. One of the best parts about living in the Salt Lake Valley is watching nature’s paintbrush at play with the abundant and colorful fall foliage during autumn. As the leaves change color from dark green to brilliant and vibrant hues of red, orange and yellows, it makes for a wonderful time to get into the mountains and enjoy the colorful scenery. Eventually those leaves fall, the weather cools down, and the mountains are covered with beautiful white snow. After a few months of colder temperatures, the weather will eventually warm up, turn to spring and in due course the hot summers again. This is the nature of season.

Just as with nature, the markets and the economy go through cycles as well. We see cycles occur with economic expansions and contractions, bull and bear markets during presidential cycles, and even the stock market has a seasonal tendency during certain months of the year. Given the challenging environment that the economy and markets are experiencing, it feels like we’ve been in winter all year! Rest assured; spring will come as it always does!

Market Performance

The month of October has generally been the most volatile month of the year. Some of the largest crashes have occurred during this month but students of market history may find hope that October has frequently been the end of bear markets as well. This year, October turned out to be a fairly strong month and that doesn’t come as much of a surprise given the large declines we saw in September. The US equity markets continue to perform better than international equities, partly due to the stronger dollar. Interest rates rose in October, which put pressure on bonds as indicated in the table below. Both stocks and bonds had a tough month mainly due to rising rates.

During the past month, these were some important things to note:

• The 3rd quarter’s GDP showed an increase of 2.6% bucking the trend of the previous two quarters.

• The Fed hiked rates for a 6th time this year moving the Fed Funds rate to a range of 3.75%- 4.00%

• We are currently experiencing our 5th major bounce this year with the previous four failing to become a sustainable rally and leading to lower lows.

The long-term trend of both stocks and bonds continues to be down and time will tell if this latest rally has legs; however, we believe the driver of this market continues to be the Fed and their aggressive tightening will be a headwind on the markets.

3 Thoughts on Cycles and Seasonality

1. Mid-term Elections & Presidential Cycle of Markets

The upcoming mid-term elections are set to take place on November 8th. Democrats currently control the Presidency, the Senate (50-50 deadlock but Vice President Kamala Harris has the tiebreaking vote), and the House (220 Democrats vs 212 Republicans, 3 Vacancies), and losing either the House or the Senate will decrease Democrats’ power in the next 2 years of President Biden’s term. Historically, the President’s party usually faces stiff losses in the mid-term elections of the President’s first term in office. In this upcoming mid-term election, the Senate appears to be a toss-up, but the House favors Republicans with economic and historical indicators flashing warning signals.

How do stock markets perform after mid-term elections?

Data from the past several decades seem to support the “Presidential Cycle Theory” that market returns tend to be weakest in the years following a presidential election and the years following mid-terms generally post the strongest returns. This theory makes some intuitive sense. Some may argue that presidential candidates and parties seeking to be re-elected would do their best to promote economic growth prior to elections.

We find this interesting data; however, the reality is we don’t have enough observable data to rely on the statistical significance of the “Presidential Cycle Theory.” We believe that the health of the economy and central bank policy carries greater weight than the midterm election results as it relates to stock market performance.

2. Year End Seasonality

Everything has a season, even the stock market has a history of making certain moves at specific times of the year. Historically, November through April has been a good time for stocks and market insiders would refer to this as seasonality. The table below shows the monthly return for the S&P 500 for nearly the last 60 years.

As you can see, seasonality in the market isn’t a sure thing, it’s simply a statistical tendency. At Copperwynd, we don’t rely on seasonality as an indicator to buy and sell but we recognize the tendencies markets have during certain months of the year. A year-end rally would bring some relief, but the market seems to be driven more by Fed policy trying to rein in inflation than anything else.

3. Inflationary Cycles

Inflation is high in the United States, but it could be a lot worse! Of the 180+ countries around the world, 82 of them have double digit inflation and 106 of them have higher inflation than the United States. There are 5 countries with triple digit inflation over the last year!

Zimbabwe 269%
Lebanon 162%
Syria 139%
Sudan 117%
Venezuela 114%

Here is a list of the world’s major developed countries (G20) and their current inflation rates.

Inflation can also move in cycles. There were 3 separate inflationary cycles from 1968-1970, 1973-1975, and 1978-1980. (see chart below) Each cycle started with an inflation surprise that prompted central banks to raise rates, which drove the economy into a recession. After each inflationary peak, policymakers relaxed their guard, whereupon prices flared again. Time will tell how cyclical the current outbreak of inflation will be, but short-term pain may be necessary for long-term prosperity. Runaway inflation would be much worse.

A few bright spots to help with inflation:

There are not very many positive aspects of high inflation; however, there are a few bright spots to help partially offset rising prices of food and fuel…

Summary

Clarity on the end to central bank rate hikes remains stubbornly uncertain and the Fed has made it clear that they are waiting for “compelling evidence of inflation easing” before a policy shift is made. The cycles and seasons of the economy/markets will continue, so as the weather cools just know that spring is around the corner.

At Copperwynd, we have allocated a small portion of the bond portfolio back into high yield; although, we will continue to be diligent followers of our models and will exit if the trend changes. Most of the bond strategy continues to be invested in short-term treasuries and with interest rates increasing the new treasuries have higher rates and you are benefiting from that. As for stocks, last month we allocated some of our cash back into the equity markets due to an “oversold” environment and we were able to capture a gain as we sold that position off recently. We continue to believe some very good opportunities will be available over the next year, and we will remain disciplined in following the trends so that we can take advantage as the markets recover.

Please join Copperwynd for our upcoming virtual Town Hall “2022 Transition: How Long Will This Last?” on Wednesday, November 16th at 12:00 PM Mountain Time.

Register in advance for this webinar: CLICK HERE

If you have questions, please contact us.

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To download the November 2022 Newsletter: CLICK HERE