Stock Market This Week: Five Themes to Watch

Those hoping for a respite from the red ink in September suffered disappointment as the equities sector again absorbed substantial losses. The benchmark S&P 500 index dipped 1.72% last Friday, capping off a trailing-week loss of 4.43%. For the year, the index is well into what analysts typically call correction territory at 23% down.

Not surprisingly given the greater emphasis toward risk-on sentiment, the technology-centric Nasdaq Composite dropped 1.8% last Friday, while it suffered a 5% loss of value for the week. On a year-to-date basis, the Nasdaq is over 31% below parity. The “standout” in terms of major indices would be the Dow Jones, though at 19% down, it’s not faring much better.

While it’s impossible to cover every catalyst which sparked the sharp downturn, investors must take a broader approach to navigating their portfolios. For instance, the British government recently announced sweeping tax cuts, adding turbulence to the nation’s debt profile and its currency.

With myriad challenges to address, below are five key themes to watch in the week ahead.

The Fed Made Good on Its Promise

Late last month, Federal Reserve chair Jerome Powell emphasized during his policy speech at the economic symposium at Jackson Hole, Wyoming that his main priority is tackling the historically elevated inflation rate through hiking the benchmark interest rate. Subsequently, a consumer price index report which indicated hotter-than-expected inflation forced the Fed’s hand.

Last week, the central bank raised interest rates by 0.75% in a largely telegraphed move. The Fed seeks to do what is necessary to bring inflation down to its 2% target. Per Baystreet, it “has now raised interest rates by 75 basis points at its last three meetings. Inflation in the U.S. currently sits at 8.3%, its highest level since the early 1980s.”

Moving forward, this framework will almost certainly facilitate a deflationary environment. Under the prior inflationary cycle, the purchasing power of the dollar decreased, creating an active incentive for investors to do something with their money to avoid wealth erosion. Under a deflationary cycle, the opposite is true. Investors have a passive incentive to do nothing as sitting on cash fosters wealth expansion.

Therefore, investors need to apply greater prudence about where they put their money to work.

Russia 'Partially' Mobilizes for War

Given Ukraine’s recent successes in launching a counteroffensive against invading Russian forces, the Kremlin responded with a partial mobilization initiative. Although Russian President Vladimir Putin stated that only military reservists will be called up, various sources report that the government conscripted students and airline employees, among others.

In response to the mobilization announcement, oil prices jumped. Looking ahead, investors may want to consider acquiring shares of stable hydrocarbon energy-related companies. Fundamentally, Russia’s escalation of the war in Ukraine indicates that the Kremlin has zero intentions of backing down. Therefore, the crisis may continue longer than many analysts anticipated.

In addition, investors may also want to consider focusing their portfolios on defense contractors. Because of the chaotic developments, Russian citizens have taken to the streets to protest. As well, those that have the resources and/or connections are desperate to leave Russia in fears of martial law and border closings.

Perhaps the biggest concern here is the rise of power vacuums in the regions of the former Soviet Union. Along with escalating tensions within Moscow, geopolitical stability stands on frail ground.

Midterm Mania

If the Fed’s hawkish monetary policy and geopolitical flashpoints didn’t impose enough challenges for investors, they must also factor in the upcoming midterm elections.

According to U.C. Santa Barbara, “In the 22 midterm elections from 1934 -2018, the President's party has averaged a loss of 28 House seats and four Senate seats. The president’s party gained seats in the House only three times, but gained seats in the Senate on six occasions. The president’s party has gained seats in both houses only twice.”

Based on historical precedent, Democrats may lose control of both the House and the Senate. Fundamentally, such a loss will likely impose significant roadblocks against the Biden administration at a time when cogent leadership is needed. Simultaneously, it’s also interesting to note that in the past, the equities sector typically increased following the conclusion of midterm elections.

Because of the unique circumstances of the new normal, investors will probably want to avoid banking too heavily on past statistics. Still, elections matter so it’s best to prepare for multiple outcomes.

Housing Market Pressure

Last year, the housing market went into overdrive as prospective buyers eager to take advantage of historically low interest rates rushed into the sector. Bidding wars erupted, sending prices to the moon. However, with the pivot to higher rates, demand has finally started to cool off in certain areas.

For those who have been patiently waiting on the sidelines, now may be a good time to at least start the exploration phase. While not wanting to inject myself into the discussion, this author visited multiple open houses this weekend. Despite this period being prime visiting hours for such endeavors, this author saw no other prospective homebuyers.

This took place in San Diego, California – a real estate hot spot because of its small town feel in a fairly large city. Even with this dynamic combined with the higher-than-average household income in America’s Finest City, activity for open houses was from personal observation zero.

While this absolutely does not mean that demand is actually zero, we may be entering a buyer’s market.

Earnings in Focus

As with last week, the earnings disclosures for this week are limited. Nevertheless, a few key reports will be on tap that investors should consider. First up, United Natural Foods (UNFI) will disclose its quarterly results. Analysts anticipate that the company, a distributor of health and specialty foods in the U.S. and Canada, will deliver earnings per share of $1.26.

On Thursday, Nike (NKE) will distribute its quarterly report, with analysts forecasting that the company will post an EPS of 93 cents, down 19.8% from the year-ago period. As well, Wall Street expects that revenue will come in at $12.3 billion, up 0.8% on a year-over-year basis.

Finally, CarMax (KMX) will also release its results on Thursday. Analysts forecast that its EPS will come in at $1.42. Market observers will look to the used-car dealership for clues about consumer sentiment and resilience.

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