Weekly market guide - Butler Financial, LTD
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Weekly market guide

Review the latest portfolio strategy commentary from Mike Gibbs, managing director of Equity Portfolio and Technical Strategy.

Short-Term Summary:

Wednesday’s much hotter-than expected CPI report was the latest upside surprise on inflation, pushing the year-over-year reading to 9.1% (41-year high). In fact, the month-over-month reading of 1.3% was one of the highest on record as well (largest since Sep 2005’s Hurricane Katrina-induced 1.4%). The ugly inflation report puts further pressure on the Fed for a heavier hike at its July 27th FOMC meeting. The market-implied odds of another 75bp hike are now 100%, and odds of a 100bp hike are up to 70%- which will take the fed funds rate up to ~2.5%. The Fed is unable to improve supply issues, but it can negatively impact demand toward supply. This is what is playing out to bring inflation under control, with high odds of economic contraction as it takes place.

That said, inflation is a lagging indicator and we expect it to moderate in the months ahead. Oil prices are trading at their lowest level since February today (and down 24% over the past month). The ag commodities (i.e. cotton, wheat, corn, soybeans) have also shown significant weakness since mid-June, which will trickle through the system and lower consumer price pressures. Moreover, many major retailers have noted over-supply. With supply improving and overall demand moderating (low disposable income and weak asset prices weigh on spending), inflation is very likely to moderate over the coming months in our view.

Equities have discounted a lot of negative news (down 24% from prior highs), but the predominant market trend still remains downward. The S&P 500 P/E multiple has contracted to a reasonable level (~17x) but may ultimately need to get to 14-16x as it did in the last several severe drawdowns (2020 Covid recession, 2018 trade war, 2016 US manufacturing recession). Q2 earnings season also began this week, and we believe forward guidance will need to be lowered (current estimates are too high in our view). The initial price reaction from the handful of companies reporting so far has been weak, supporting our continued downward bias for the short-term. We expect a retest or undercut of the lows at some point, and highlight the 3400-3600 area as our favored level of potential downside. At 16x trailing 12-month $217 earnings, the S&P 500 would trade at 3472. This P/E contraction would be in line with that seen during the dotcom bubble and credit crisis recessions. Technically, this level coincides with the 200-week average (3519) which has largely held as support over the past decade and is near pre-Covid prices.

Despite our cautious short-term stance, long-term investors should refrain from getting overly negative with the S&P 500 already down over 20% from its highs, and should turn their focus to bull market potential rather than what may be left on the downside of this bear market. Recessionary bear markets average -33% historically, but bull markets gain 152% on average. Don’t lose sight of the opportunity on the other side of the current weak trend.

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Index Definitions

The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market.

The Dow Jones Industrial Average (DJIA) is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange (NYSE) and the NASDAQ.

The NASDAQ Composite is a stock market index of the common stocks and similar securities listed on the NASDAQ stock market.

The MSCI World All Cap Index captures large, mid, small and micro-cap representation across 23 Developed Markets (DM) countries. With 11,732 constituents, the index is comprehensive, covering approximately 99% of the free float-adjusted market capitalization in each country.

MSCI EAFE (Europe, Australasia, and Far East) is a free float-adjusted market capitalization index that is designed to measure developed market equity performance, excluding the United States & Canada. The EAFE consists of the country indices of 21 developed nations.

MSCI Emerging Markets Index is designed to measure equity market performance in 23 emerging market countries. The index’s three largest industries are materials, energy, and banks.

Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor’s results will vary. Past performance does not guarantee future results. Future investment performance cannot be guaranteed, investment yields will fluctuate with market conditions.

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