Market Update for October 18, 2022
After a ton of daily movement pro and con, the S&P 500 is trading just above 3,700 today, 10/18/22., the same level it traded at in mid-June 2022. October is modestly positive, thus far, after a terrible September where the index lost over 8%. The stock market historically tends to do well in the November- January period, so I am hopeful that 2022 losses will be reduced as we head towards year-end, but it clearly has been a very challenging year, not only for the S&P 500, but most asset classes domestically and globally.
I have made many investments on behalf of clients in the past few months that depend on the stock market broadly making money over the next 3-to-6 years. I feel very comfortable with these bets. It is anyone’s guess how long this malaise will last, but when we look out a few years’ time it would be a large surprise if the trend is not upward from these levels. For one, earnings have NOT declined thus far. 2022 broad market aggregate earnings estimates have been reduced several times, as have 2023 estimates, but both remain above 2021 full-year levels.
In terms of the stock market, you basically have momentum and expensiveness. In other words, the stock market can be deemed to be relatively cheap or relatively expensive, just like it can be deemed to have good upward momentum or lack thereof. Clearly today we have no great momentum helping our cause- as I lead off this post, stocks have gone essentially nowhere in 4 months’ time. However, stocks are clearly CHEAPER than they were, as stock prices have declined in the face of modestly rising earnings (while revised downward, 2022 S&P 500 earnings estimates are $224.38 per share, while 2021's earnings were $210.20 per share). People may collectively wake up and decide to buy the beaten-down stocks that are “on sale,” and traditionally November is a common time for this event to occur.
I rarely talk about currencies but they beg a comment here today. The US Dollar is up 16.8% on the year-to-date, and 19.6% for the rolling one-year(!). This strength is exacerbating the weakness in stocks. Let’s dumb it down and say a given company is worth 10 beans. If each bean is worth what it was worth yesterday, and the company hasn’t changed, it’s still worth 10 beans. But let’s say each bean is 20% more valuable than it was yesterday. In this case, even without the company changing, it is now worth about 8 beans. Another way to say it is for the company to now be worth 10 beans it would have to have appreciated around 20% in value. For it to have increased to, say, 12 beans, it would have to be a company worth around 40% more than before the two increases. In this way, it’s difficult for a company to increase its value substantially in the face of a strengthening dollar- all things equal, the company’s value will decline in dollar terms. This dollar strength is responsible for some of the weakness in stocks in 2022.