With the conclusion of the final session for September ending in red ink across the major indices, investors must be prepared for a possible rough ride in the coming weeks ahead. Last Friday, the benchmark S&P 500 ended the session down 1.51%. For the week ending Sept. 30, the index slipped slightly more than 3%. For the year, it’s looking at a performance more than 25% below parity, signaling a bear market cycle.
Even worse, the technology-centric Nasdaq Composite hemorrhaged in excess of 33% of market value since the beginning of this year. Last Friday, it too lost 1.51%, while succumbing to a 3.66% loss in the trailing week. The venerable Dow Jones represents the “best” performer among the majors but only in a relative sense, with the index declining 21.5% YTD.
Moving forward, investors must contend with myriad challenges. Broadly speaking, the crisis in Ukraine threatens geopolitical stability. Back home, key earnings reports have revealed expanding vulnerabilities in the consumer economy. With the Federal Reserve committed to its hawkish monetary policy, circumstances for purely risk-on assets don’t appear encouraging.
In other words, it’s time for investors to strap in and hold on as the market may give us a wild ride. Below are five themes to watch.
Russia Suffers Major Setback
Observers analyzing the battlegrounds of Ukraine noted that the nation’s resistance forces began encircling a key city called Lyman. On Saturday, The New York Times reported that Ukraine launched a successful counteroffensive, liberating it. The victory presents two fundamental catalysts.
First, Ukraine’s military achievement represents a major embarrassment for the Kremlin. Just a day prior to the liberation, Russian President Vladimir Putin annexed regions in Ukraine, including the area encompassing Lyman. Notably, Putin subtlety threatened the use of nuclear weapons to defend the annexed territories as Russian lands.
Second, Lyman features strategic military importance. Per Defense Secretary Lloyd J. Austin III, the city “sits astride the supply lines of the Russians, and they’ve used those routes to push men and materiel down to the south and to the west.”
It’s unclear how the Russians will respond to this latest major setback. However, from an investor’s perspective, it’s likely that this conflict will extend at least into next year. Therefore, portfolios may need to be adjusted to reflect this paradigm shift.
Consumer Economy Could Be Fading
Last week, one of the most important earnings disclosures came from athletic apparel giant Nike (NKE). An iconic enterprise, Nike commands an enviable brand presence. Therefore, even with the headwinds that the consumer economy has struggled under, the sports apparel maker enjoys the cachet to rise above the muck.
On paper, the performances of the company’s fiscal first-quarter results were solid. Both revenue and earnings beat Wall Street’s respective consensus estimates. Part of the reason for the success was naturally brand strength and surprisingly strong consumer demand (for certain products).
Unfortunately, NKE stumbled in the afterhours session following the disclosure. The Wall Street Journal reported that “inventories rose 44% to $9.7 billion in the latest quarter, and higher discounts and freight costs squeezed profit margins. Executives said they would mark down more goods, especially apparel, heading into the holidays.”
Because the Fed remains strongly committed to attacking historically high inflation through raising the benchmark interest rate, consumers may have less incentive to acquire discretionary goods. As well, with major companies freezing hiring and possibly leading down a road to mass layoffs, excessive exposure to discretionary retailers could be dangerous
Declining Rentals Spark a Warning
One of the most contentious debates that erupted during the post-pandemic new normal is housing price trajectory. Under the common assumption, higher interest rates lead to lower housing prices. In turn, such a dynamic could provide relief for apartment rentals.
However, some experts remain skeptical about the notion of declining rental rates. Typically, rent increases lag home price increases. Thus, even if housing prices have cooled, rentals should continue rising.
Unfortunately for those that depend on the validity of this thesis, that’s not what the actual data shows. According to the October 2022 edition of the Apartment List National Rent Report, its national index for rental rates declined 0.2% over the course of September. This marks “the first time this year that the national median rent has declined month-over-month.”
Given that housing-related prices skyrocketed throughout much of the new normal, the lower demand profile could imply a weakening economy. Therefore, investors will want to apply extreme caution about getting involved with opportunities associated with real estate.
Cryptos Disappoint Following the Merge
Following the spectacular crash in the cryptocurrency market in November of last year, sentiment has grown more pessimistic. However, the digital assets sector did have one potential catalyst that could right the entire ship, an event called the Merge. Without getting into too many details, the Merge involved a major blockchain project transitioning its consensus protocol mechanism from proof of work to proof of stake.
On Sept. 15, blockchain developers successfully executed the Merge. At the time, the total market capitalization of all cryptos stood at around $990 billion before settling in a range around $960 billion. The problem? As of the wee hours of Oct. 2, total market cap sits at approximately $938 billion.
To be fair, cryptos tend to be wildly gyrating assets. Thus, on one hand, investors shouldn’t read too much into the red ink. But on the other hand, the implementation of a major undertaking in the blockchain realm yielded broadly negative results. Unfortunately, then, virtual currencies may be in a corrective phase that may take time to break out of.
Earnings in Focus
For the first week of October, the earnings calendar is light. However, investors should pay attention to the below disclosures, which may reveal greater insights into the economy. First up, consumer packaged goods holding company Conagra Brands (CAG) will report its quarterly results on Thursday. Wall Street anticipates the company will produce earnings per share of 52 cents. Most significant here is whether management provides clues about the resilience of consumer spending.
Also on Thursday, Levi Strauss (LEVI) will reveal its financial performance for the last three months. Analysts expect the company to deliver EPS of 37 cents. Like with Nike, market observers will look to see if Levi Strauss’ products manage to resonate with consumers during this challenging period. If not, it could be a long day for the company.
Finally, on Friday, cannabis specialist Tilray (TLRY) will disclose its results. Wall Street experts anticipate that the company will deliver an EPS loss of 7 cents. Fundamentally, Tilray enjoys a cynical catalyst regarding its botanical therapeutic business. However, the company has struggled deeply this year.
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