Is A Market Drop Imminent?

Weekend Review:

Once again it’s been a week of mixed messages, or maybe a week of one message but with mixed interpretations.

The Federal Reserve will push rates higher than previously expected and keep them there for an extended period, Chair Jerome Powell said Wednesday in remarks likely intended to underscore the Fed’s single-minded focus on combating stubborn inflation.

The market somehow read this as being a positive sign as he also signalled that the Fed may increase its key interest rate by only a half-point at its December meeting, a smaller boost after four straight three-quarter point hikes. Rate increases could then fall to a more traditional quarter-point size at its February and March meetings, based on previous Fed forecasts.

However, none of this is new and if anything, his reiteration that rates will be higher for longer should have been negative for the market. But investors seem so keen for some good news, that they’ll see it even when it isn’t there. The S&P 500 jumped 122 points, or 3.1%. It had fallen before Powell spoke.

Powell said the Fed is seeking to increase its benchmark rate by enough to slow the economy, hiring, and wage growth, but not so much as to send the U.S. into recession.

It has lifted the rate six times this year to a range of 3.75% to 4%, the highest in 15 years. Those increases have sharply boosted mortgage rates, causing home sales to plunge, while also raising costs for most other consumer and business loans.

“We think that slowing down at this point is a good way to balance the risks,” Powell said. “The time for moderating the pace of rate increases may come as soon as the December meeting,” which will take place Dec. 13-14.

But Powell also stressed that smaller hikes shouldn’t be taken as a sign the Fed will let up on its inflation fight anytime soon.

“It is likely that restoring price stability will require holding (interest rates) at a restrictive level for some time,” Powell said. “History cautions strongly against prematurely loosening policy.”

As we said, this is the same message we received last month. December will almost certainly bring another 50 basis point increase to US rates. The fact that it is less than the previous 75 point move has been all but announced. We don’t see any real change to FED policy.

Friday's payroll figures confirmed that the labour market is still strong, and again, if anything this is a bad sign for the market. The S&P did immediately drop over 1% but managed to claw most of that back by the end of the day.

Our traders have enjoyed the rally over the last couple of months but are now being extremely cautious. Most active strategies are currently short, and even the buy or flat strategies only have fairly small positions on.

Their job is to protect capital as much as it is to make profits. If the market looks like it has over recovered as it does now, they will move in and out but without taking too much risk.

Most of the major investment banks are expecting a drop in stocks over the next few months, the key will be to miss that fall but the longer it takes to come, the harder it will be to time.

Still, as we’ve said, the last couple of months have been good and Q4 has got off to a good start with a few strategies performing really well. As is often the case when markets move up further than expected, the trackers do very well as the only way to get every move, is to continuously track the market. However, they will also accept losses when it drops.

The key component with a tracker strategy is time; it will always perform given enough time. Our leverage trackers will follow the market at 2 or 3x the rate to heighten gains during strong periods of market growth.

We also suggest a tracker or two in a diverse portfolio, then add a couple of other strategies over the top for shorter term movement. It’s not an exact science, but in our experience, this mix of strategies are the building blocks of the most solid long term portfolios.

So, we are now in December, the home straight of the 4^th quarter. Let’s have a look at who has performed the best so far:

Strategy-   October Perf,    Nov,      Total in Q4                  

S&P Tracker           15.6%,   8.5%,    24.1%

FTSE Tracker (x3)   7.1%     12.0%,  19.1%

DAX Trader             17% ,    1.9%,    18.9%

FTSE MKT Trader   12.4%,  6.4%,    18.8%

Cambridge Future 12.6%,  4.1%,    16.7%

If December can continue this run then we might be able to get out of 2022 relatively unscathed. It has been a horrible year for stocks, there’s no doubt about it. The drop during the pandemic was rough, but it was quick. Stocks had mostly recovered by the summer. This year, it just got worse.

Market                        Year to date

FTSE 100                     0.68%

Nikkei                          -5.28%

CAC                              -6.58%

DAX                             -9.31%

S&P500                       -15.1%

Hang Seng                   -19.76

Nasdaq                         -27.32%

The bottom in the US (so far) was near the beginning of October, (the day after JP Morgan CEO announced that he thought the market could drop another 20%).

We hope we don’t get there again, but we also don’t believe that this recent rally can be sustained. It will be choppy for the next 6 months before we get any clear indication of whether inflation can be controlled. It can’t keep going up, but unless we see deflation at the end of next year, prices will still be significantly higher than they were 18 months ago and that isn’t good for company profits.

Demand will slow, GDP will flatline, but will the consumer still manage to find enough spare cash to drive retail? This isn’t a question that we know the answer to at this point, but we will watch the numbers closely and report in when we do.

One thing we do know is that these energy prices will leave a lot of households with significantly less disposable income, and that’s not good for growth.

A rising market, or one that trades in ranges would both be very good climates for our traders. Although most investments stagnate in ranging markets, on our platform our traders have a habit of buying at short term lows, and taking profit at short term highs. Therefore, whether the market stagnates within a tight range, or rises moving forward- we hope our traders and trading teams take advantage for our clientele.


If you have an underperforming portfolio elsewhere, or are sitting in cash waiting for an entry point- contact our team for a FREE consultation. Learn how to build a portfolio that aims to yield 2-4 x market performance per annum.

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