As widely noted, the first six months of 2022 is the worst start of the year for the S & P 500 since 1970. More stocks have hit new 52-week lows than highs on the NYSE and NASDAQ for a record 31 consecutive weeks.  There has been no place to hide for the exception of energy as almost every strategy and asset group is producing steep negative returns.

This drubbing has affected psychology as only 26.6% expect stock prices to rise in the next 12 months, the lowest level since 2012 according to a Conference Board Survey.

And then there is the bond market.  Bloomberg created a “non-exhaustive” list of debt ranging from sovereigns to corporates to mortgage backs whose prices have declined the most on record.

Some are suggesting that a bottom is at hand utilizing the Conference Board data as evidence.  Historically stock prices bottom when all are pessimistic.

It is my firsthand experience a bottom will only occur when all stop suggesting one is at hand.  Total capitulation is required.

Quantitative tightening has commenced.  The Fed is caping the monthly runoff at $47.5 billion–$30 billion for Treasuries and $17.5 billion for mortgage-backed securities—until September.  These thresholds will then double to a combined $95 billion.  That compares to a peak of $50 billion a month when the Fed performed the exercise starting in 2017.

Yesterday’s WSJ quantified what part of the Treasury spectrum the Fed is expected to roll over.  The Fed is not planning reduce its holding of Treasury bills, only longer-term notes and bonds “especially focusing on long term bonds.”

The Journal rhetorically asked who will buy this debt, inferring the possibility of higher long term interest rates.

And then there is debt service.  The interest coverage is currently around $350 billion.  The Journal states “under current Fed policy, the federal government’s annual gross interest expense could reach $1 trillion, causing federal borrowing to continue to grow rapidly.”

To place this amount into perspective, $725 billion is spent annually for both Medicare and defense.

Will the national debt become a major narrative and driving force?

It is often stated the most obvious conclusions are the ones that are ignored.

Second quarter earnings season is about to commence.  Goldman asked the rhetorical question are analysts really being analysts given their lofty earning and margin forecasts.  As noted earlier corporate margins are expected to remain at current record levels.

Is this realistic given the surging dollar [note:  55% of S & P 500 sales are from abroad], inflation and labor costs?

We may perhaps now the answer in quick order.

Oil has been the only performer in 2022.  Some are suggesting the period of this over performance is at hand.

OPEC is 500 million barrels behind on their pledge, the result of the lack infrastructure spending where funds have been diverted to transfer payments.

Can Saudi Arabia make up the difference?  Aramco—the state-owned Saud Arabian oil giant, claims it can sustainably pump 12 million barrels a day, well above the August target of 11 million.

Bloomberg writes Aramco has only pumped at this level for a grand total of wight weeks in its entire history, in late 2018 and early 2020.  Now it faces the prospect of sustaining that level or higher for many months.

How will this unfold?  The possible implications are significant.

What will happen today?  Trading is expected to wane given the upcoming three-day holiday.

Last night the foreign markets were down.   London was down 0.24%, Paris down 0.03% and Frankfurt down 0.06%.  China was down 0.32%, Japan down 1.73% and Hang Seng down 0.62%.

Futures are off about 0.25% following the greatest first half drop in over 50 years.  The 10-year  is up 18/32 to yield 2.95%.


The views expressed herein are those of Kent Engelke and do not necessarily reflect those of Capitol Securities Management. Any opinions expressed are statements of judgment on this date and are subject to certain risks and uncertainties which could cause actual results to differ materially from those currently anticipated or projected. Any future dividends, interest, yields and event dates listed may be subject to change. An investor cannot invest in an index, and its returns are not indicative of the performance of any specific investment. Past performance is not indicative of future results. This material is being provided for informational purposes only. Any information should not be deemed a recommendation to buy, hold or sell any security. Certain information has been obtained from third-party sources we consider reliable, but we do not guarantee that such information is accurate or complete. This report is not a complete description of the securities, markets, or developments referred to in this material and does not include all available data necessary for making an investment decision. Prior to making an investment decision, please consult with your financial advisor about your individual situation. Investing involves risk and you may incur a profit or loss regardless of strategy selected. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct. If you would like to unsubscribe from this e-mail distribution, please reply to this e-mail and indicate that you wish to unsubscribe in your response.