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Volume 11, Edition 29 | September 26 – September 30, 2022

Finding Quality Merchandise Marked Down

Doug Walters, CFA
Market declines can be emotionally draining, but long-term investors see opportunity amongst dislocation. One factor is looking particularly interesting these days.

Contributed by Doug Walters, Max Berkovich, David Lemire, Eh Ka Paw

Good riddance to the third quarter of 2022. Stocks, bonds, gold… you name it, and it was likely down this quarter and year. Declining account balances are not fun, but market moves like this have the potential to create opportunities for patient long-term investors beyond tax-loss harvesting.

Famed investor, Warren Buffett, is never short on quotes. One from 2008 I had not heard in a while is, “Whether we’re talking about socks or stocks, I like buying quality merchandise when it is marked down.” He has a number of these quotes with a similar theme that comes out during times of market stress. The idea is if you liked stocks at the beginning of the year, you should like them even more now that they are cheaper.

We agree wholeheartedly in principle, though would warn that stocks were getting a bit expensive at the beginning of the year. So the first part of the sell-off was arguably partly normalizing. As the sell-off continues, though, we are beginning to see some “quality merchandise” in certain departments of the stock market superstore start to go on sale. In particular, we highlight Value stocks.

It is not an intuitive time to own Value. After all, cheap stocks can get hit hard in a downturn. But the market is forward-looking, and current valuations (along with other positive signals we monitor) provide long-term investors the cushion to wait out any further downside, in our opinion.

We will have our formal Q3 review in the coming days, so stay tuned!

4.9%

Core PCE Inflation

PCE inflation followed the playbook of CPI inflation by disappointing with a higher-than-forecast print. Analysts were expecting a reading of 4.7%. Investors took it in stride this time, with minimal market reaction apparent.

Headline of the Week

Stocks tried to rally but ended the week lower. PCE inflation was expected to be a big focus for investors, but the worse-than-expected core print of 4.9% did not seem to phase investors. The more significant news of the week was the challenges in the UK bond market.

  • Newly installed UK Prime Minister Truss and her Chancellor of the Exchequer (the UK equivalent of the US Treasury Secretary) announced a £45B package of energy subsidies and tax cuts a week ago.
  • The sizeable fiscal stimulus puts upward pressure on inflation at a time when the Bank of England (BOE) is fighting rising prices through rate increases and balance sheet reductions. In response, investors deduced that the BOE will have to raise rates even more and even faster.
  • The details are a bit wonkier than we need to go into here. Suffice it to say… the bond market began to unravel, large pension funds were getting margin calls, the value of the British Pound almost fell below the US dollar, and the BOE had to pivot quickly from quantitative tightening (to fight inflation) to quantitative easing (to restore market order). Yikes!
  • The moves by the BOE have helped restore some market confidence.

The Week Ahead

A slow week lies ahead, with the US Jobs and Purchasing Managers Institute reports the potential major market movers.

Jobs, Jobs, Jobs

The first Friday of the new month brings the Non-Farm Payroll report.

  • Expectations are that 250,000 jobs were created in September, less than the 315,000 in August.
  • The average work week is expected to stay flat and hourly wages are expected to tick down a bit.
  • Any deviation from the consensus will cause volatility, in particular, if the job creation number is much lower.

Buyers Guide

The Institute of Supply Management’s Purchasing Managers Index (PMI) is out next week, both the manufacturing and services flavor.

  • The ISM’s PMI is viewed as a reliable and consistent indicator of the overall economy.
  • A measure below 50 is contraction and above expansion.
  • The services report is expected to come in at 56, and the manufacturing at 52.3, both a slight decline from the August reads.
  • A sub-50 number will be unwelcome by the market.

Bank Down Under

Both the Reserve Bank of Australia and The Reserve Bank of New Zealand have a rate decision next week.

  • Australia is expected to hike by ½ of a percent. This will be the 6th hike this year.
  • New Zealand is also expected to hike ½ of a percent.

The Gold Standard

Chinese markets are closed all week for Golden Week.

  • There are three Golden Weeks. This upcoming week will be the one celebrating National Day.
  • National Day celebrates the proclamation of establishing the People’s Republic of China on October 1st, 1949.
  • The week traditionally boosts tourism and spending as people reunite with family and friends.

Atoning for Mistakes

Tuesday night is the Start of Yom Kippur, The Day of Atonement for the Jewish people.

  • Besides prohibition from working, eating and drinking are also prohibited on this holiest day in the Jewish calendar.
  • For those observing, we wish you and your family an easy fast.

May you be inscribed in the book of life!

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