Equity Leaders Weekly

 2008 & 2022 Year to Date S&P 500 Index (SPX.I) vs. Crude Oil Continuous Contract (CL.F) and CBOE 30-year Interest Rate (TYX.I) 

It has been another rough week for equity markets around the world. A surprise interest rate increase from the Swiss National Bank in addition to the larger than expected US Fed rate hike sent shockwaves through world markets reminding investors that the current monetary tightening trend is likely just getting started. 

Meanwhile this week, reports of high and increasing inflation from Canada and the UK is keeping the pressure on central banks to do more. In fact, this morning, big oil producer Norway joined the parade of central banks raising rates by 0.50% at its latest meeting.  

The market retreat was very widespread, a recent survey of developed and emerging market Country ETFs found nearly all of them on bearish signals with new downlegs having started in the last few days. A similar review of Sector ETF performance indicated widespread weakness. 

Perhaps the most troubling turn of events in the last week was Friday’s big selloff in crude oil and energy stocks which has extended into this week and spread into other commodities/resource sectors. So far this year, energy has been the top performing sector and one of the few places that investors have been able to hide from stormy markets. 

In other action, the US Dollar has continued to strengthen with gold keeping pace, while other major paper currencies plus cryptocurrencies have continued to crumble. Interestingly the US 10-year treasury note yield has levelled off, perhaps to digest last week’s rally which could help bond prices to stabilize but it’s too early to tell if this is a pause or a change in direction. 

The main event of the business news calendar for the week arrives this afternoon wits stress test results for big US banks due after market close. While positive results could help to shore up investor support, the ability of banks to withstand economic or monetary headwinds could also give the Fed the green light to continue raising interest rates. On the other hand, any signs of mounting difficulties could raise a whole other set of questions. 

Here at the Equity Leaders Weekly we have increasingly received questions from advisor clients about whether the S&P 500 having recently recorded an official bear market with a 20% decline from the peak, if the selloff is over or if we could see continued difficult times ahead. In this week’s edition we break from our usual format a bit and compare market conditions for interest rates, crude oil and equities so far this year with what happened back in the 2008 bear market. Based on this study, it appears that stock markets in general remain vulnerable, but energy prices could potentially be forming a significant top. 

2008 S&P 500 Index (SPX.I) versus Crude Oil Continuous Contract (CL.F) and CBOE 30-year Interest Rate (TYX.I)

In the first half of 2008, the S&P 500 steadily drifted downward losing 12.8% , while long-term US interest rates were steady. The biggest story of the first half was a huge 47.2% spike in the price of oil, which drive up prices at the pumps and impacted consumer spending just as a financial crisis was brewing. After retesting and failing to overcome resistance near $147.50/bbl in July of 2008, the crude oil price crumbled, giving up all of its first half gains by September and finishing the year down sharply as the financial crisis boiled over and the US economy went into recession. The S&P 500 held steady through the summer then plunged in the fall, finishing the year down 38.5%. The US 30-year interest rate started to drift lower in the last summer then really dropped off later in the year as Congress and the Fed  responded to the financial crisis.   

2022 Year to Date S&P 500 Index (SPX.I) versus Crude Oil Continuous Contract (CL.F) and CBOE 30-year Interest Rate (TYX.I)

The first half of 2022 has some similarities to 2008. Equity markets have been struggling and through to June 21, the S&P 500 is down about 21.0% year to date. The price of crude oil has soared 45.6% so far this year underpinning rapid increases in inflation pressures. Crude oil, however, has been struggling with resistance near $120.00/bbl having twice failed to break through and really needs to get through there to confirm its uptrend remains intact. On the other hand, a drop back under the $100.00/bbl round number could signal the start of a new downtrend.One key difference this year is that the CBOE 30-year interest rate has been trending upward through this year in a similar uptrend to the oil price. At this point, central banks remain hawkish and focused more on getting inflation under control than supporting the economy or asset prices. Until that focus changes, the economy remains at risk of a recession and both equity and commodity prices 

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