It’s a beautiful morning in London. Suddenly, there appears to be a buzz again following 10+ days of mourning for the death of HM Queen Elizabeth, culminating in the events yesterday including Her Majesty’s funeral at Westminster Abbey. No country does pageantry like the British, and the presentation and organisation of the events yesterday to lay the Queen to rest were incredible and full of emotion.
I had several bi-lateral email comments on the most recent E-MorningCoffee weekly update (week ended Sept 16) which I thought were worth mentioning to my broader reader base, especially since both are implying a further leg down on equities.
RM[1] wrote that I am overly optimistic in my market outlook (really?), and that he sees a decline in the S&P 500 to the 3,200 level. This implies a further decline of 17.9% from yesterday’s close of 3,899.89. 3,200 would represent a total decline of 33.3% from the all-time high for the S&P 500 reached near the beginning of this year. This level would not be out-of-line with the historical averages for bear markets. According to bankrate.com (article here), the average decline (peak to trough) in the S&P 500 during bear markets since 1929 has been 37.1%, and the median decline has been 33.5%. The average time peak-to-trough has taken 344 days, and the median has taken 240 days. Learning this and looking at how wobbly things are at the moment, I have to agree that the S&P 500 at 3,200 does not look out of the realm of possibility based on technicals alone.
So what about fundamentals? RM and I agreed that resistance at current levels could be broken by 3Q22 earnings, as Street analysts remain overly-optimistic. For example, Yardeni Research is expecting 3Q22 earnings for the S&P 500 to decrease 5.4% YoY, whilst Street analysts’ consensus expectations are for earnings to increase 4.3% (YRI S&P 500 Earnings Forecast here). With FedEx and others starting to warn about the uncertain outlook and waning demand, it is looking increasingly likely that analysts might be overly-optimistic. If this proves to be true, it is almost certain that stocks could fall further.
Another of my readers SK directed me to take a look at a couple of shipping indices as barometers of the direction of travel of the global economy. This made perfect sense following FedEx’s 1Q23 earning miss and the withdrawal of guidance last week, which the company attributed to a combination of economic weakness and further uncertainty in the global economy as central banks continue to tighten monetary policy to rein in inflation. I am still looking at this, but I did manage to find an interesting comparison to the S&P 500 which is the Breakwave Dry Wave Bulk Shipping ETF (BDRY) (and this is available to compare to the S&P 500 on YahooFinance.com). The graph is below:
This is a very short comparative history because BDRY is not a very old ETF. Looking at the chart though, it certainly suggests that the BDRY is a decent leading indicator, usually changing direction before the S&P 500. Assuming the BDRY is a forward indicator, not dis-similar to FedEx because it provides a picture of global shipping, it is clear that the broader freight shipping business is fading fast, much more sharply than the S&P 500, which suggests further declines in the S&P 500 might lie ahead.
This is not such good news, but at least it’s a sunny and buzzy morning here in London and certainly time to move forward. Have a good day, and thanks to RM and SK – and others – for the feedback, which I am going to try to feature more proactively in the future.
[1] I am not using full names because I have not asked them if I could use their names in this blast.