September Update: The 5 Charts to Watch

September Update: The 5 Charts to Watch by Cameron Dawson
September 21, 2022

1. Passing the Buck from Goods to Services

The source of elevated inflation has shifted in recent months. The early days of inflation were driven by Goods inflation from surging Goods demand during lockdowns and supply chain stress. This source of inflation has moderated significantly as supply chains heal (lower shipping costs), demand patterns shift (consumers aren’t repeating big-ticket purchases like grills and furniture), and inventories build (companies thought elevated pandemic demand would stay but are now being forced to discount to move excess inventory).

2. Tight Labor Market, High Wages, High Services Inflation

Now that Goods inflation has moderated, today’s elevated inflation is being driven by Services, which are heavily influenced by wages. Given the tight labor market, wages are growing at +6.7% YoY, feeding into higher Services prices. Services inflation, along with wages, tends to be “sticky,” meaning it will take time for this inflation to moderate back to the Fed’s 2% target.  This keeps the Fed from pivoting to accommodation and is why the Fed is expressing willingness to see higher unemployment in order to control inflation.

3. A Retest of the June Lows in Play?

We have been watching 3,900 on the S&P 500 as a key battleground area for bulls and bears all summer. Friday’s break below 3,900 puts a retest of the June lows near 3,600 in play. Also near 3,600 is the 200-week moving average, which has been an important support level for the market coming out of the Great Financial Crisis. Though the Fed’s accommodative posture is different compared to the post-GFC bull run and this may not be the ultimate low for this year, we think the risk-reward for long-term investors looking out 12-24 months gets much more attractive near these levels.

4. Growth Stocks Are Too Expensive Given Liquidity Backdrop

We continue to see valuations as a risk for this market, both capping the upside for rallies and potentially being a source of downside if valuations fall below average as they typically do during tightening cycles and recessions. Growth stocks are particularly challenged, trading near 24x forward earnings. Growth stocks are too expensive given the tight liquidity backdrop and higher rate environment. 

5. All is Not Bad! Surprising Strength Out of Consumer Discretionary

There are two key bright spots for this market with light/short/bearish positioning (see the full slide deck) and the relative performance of cyclical/risk-on parts of the market, like Consumer Discretionary. Usually, Discretionary outperforms in the early days of a recovery as the stocks sniff out that the worst is behind us. They are contrarian performers (good when things feel bad and bad when things feel good. Recent outperformance in Discretionary is skewed by major index weights (AMZN and TSLA are 44% of the index), however even when equally weighted, Discretionary is performing better than might be expected given news flow. Contrarians take note.

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