What a Time to be Alive!

Market Memo

August 2022 – By Kyle Rohrwasser

Since our last Market Memo, a lot of information and news has come out changing the short-term paradigm within the marketplace and economic environment. We here at Vantage believes that we are still working through the effects of the pandemic as well as its economic response. From recent record-high inflation, war overseas, energy shortages, and inverted yield curve, low unemployment, negative GDP, and a hawkish Fed; we live in a unique and new market that is still finding its place. 

Since our last memo, Congress has passed a $200 Billion “CHIPS ACT” to promote domestic semiconductor production. Congress also passed “THE INFLATION REDUCTION ACT OF 2022” aimed to increase corporate taxes, tax enforcement, reform prescription drug pricing , and provide more incentive to green initiatives. The “PACT ACT” was also passed, providing additional medical benefits, specifically to those in post 9-11 combat.

We had cooling inflation report, it still sits at 8.5% YoY but an obvious improvement from last month’s YoY 9.1%, this was mostly driven by lowering energy costs. Crude is now $92/barrel down 23% from the June high of $120/barrel. We did see food prices increase by 1.1% and owners rent equivalent increase 0.6% during that same time. The Federal Reserve is paying close attention to the next few major economic reports as they have stated they are willing to move rates more to address persistent inflation. Another dip in the next inflation report would most likely be a tailwind for equities as it assumes a flattening or reduced federal funds rate sooner than anticipated. But the Fed has maintained that there is still a long way to go considering their initial inflation goal was 2%.

The S&P 500 is up 12% since the start of July, but many fear that the market may be ahead of itself. This recent rally has been on the news of lower inflation and “not as bad as expected” earnings. Some analysts believe the market is early to the party as the 2-year and 10-year treasury spreads are still inverted, and the Federal Reserve maintains they will continue to raise rates if needed. Next month will (QT) quantitative tightening (Reduction of Federal Reserve balance sheet) be in full effect as well. We are pleased to see the recent run in the market, but remain cautious over the next few months as other economic indicators show signs of slowing. 

With this recent rally, the price to earnings multiple (P/E ratio) on the S&P 500 has jumped from sub 16x earnings to over 18x earnings in less than a month and a half of trading (25-year historical average is 16.85x). This move has been on the Price side of the Price/Earnings formula and if we see some depressed earnings next quarter, that multiple will become larger and indicate that we may be overpriced at these levels. We still are positive on equities long term but remain cautious until we have clarity on where rates will settle and the expectations of longer-term economic indicators. 

We firmly believe that maintaining a well-diversified long-term approach is the best method towards long term, risk adjusted returns. Even more so now with the amount of market and economic uncertainty in the near future.

This material is for informational purposes only.  It is not a recommendation or solicitation to buy or sell any securities.  Vantage Financial is not a tax advisor; please consult your tax advisor prior to making any investment decisions.  Vantage Financial is an Investment Advisory Firm registered with the Securities and Exchange Commission (“SEC”).  SEC registration does not imply any particular level of skill or expertise.