1 Minute Market Report November 6, 2022

David I. Templeton, CFA profile picture

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In today’s edition of the 1 Minute Market Report, I focus on the 5.4% bounce we’ve had since the October 12 low and highlight the parts of the market that have gained the most ground. I start with the returns of the the major asset classes, and then work down through the sectors and then the capital groups.

The rebound

After rallying 9% from the October 12 low, the market pulled back last week but is still 5.4% above the low.

11-6 market rebound

Performance of the main asset classes

Here is a look at the performance of the major asset classes since October 12 (the rebound) and to date. European stock markets are up 11.5% on average since bottoming, but continue to lag the S&P 500 so far this year.

The small-cap Russell 2000 is outperforming the S&P 500 from the bottom and year-to-date. Commodities are outperforming all other major asset classes on YTD, largely due to rising prices for oil, natural gas and agricultural products.

Bonds are having their worst year since the 1980s, courtesy of the Federal Reserve-induced general rate hike. Volatility, while still historically high, has eased somewhat since the October low.

The newest asset class, blockchain, has not participated in the rebound and has lost more than half of its value to date. It will probably recover, but it will take some time to recover all the lost ground.

Asset class performance 11-4

Equity Sector Performance

For this report, I use the expanded sectors posted by Zacks. They use 16 sectors instead of the standard 11. I believe that using all 16 gives a more complete picture of the areas of the market that attract the most buying and selling interest from investors.

Defense contractors such as Boeing (BA), Lockheed (LMT), and Raytheon (RTX) are leading the way higher from the October low. Energy, which has been under pressure recently, has perked up again and leads the YTD draw by a mile.

Lagging behind the rest of the pack are the usual suspects: technology, consumer discretionary and communications services. Meta (META) can’t get out of its own way, and even Alphabet (GOOG) (GOOGL) is struggling.

11-6 performance of the equity sector

Performance of the shareholder group

For groups, I separate stocks in the S&P 1500 Composite Index by shared characteristics such as growth, value, size, cyclical, defensive, and domestic vs. foreign.

Defensive names in health care, consumer staples and utilities are leading the rebound and YTD numbers. Overseas developed markets, especially in Europe, are recovering nicely. Value is outpacing growth in all size categories.

The top 7 stocks by market cap (big tech names like Apple (AAPL), Microsoft (MSFT), Alphabet) are by far the worst performing group of equities so far this year. While all other groups are up from the October low, these stocks are headed in the wrong direction.

11-6 performance of the equity group

final thoughts

You may be wondering why I have been calling the October 12 low “the bottom”. There is little to prevent the market from making a lower low, thereby establishing a new bottom. In fact, we may make several new lows followed by more failed recovery attempts before this bear ends. When I say that the October low was the bottom, I am intentionally omitting the “for now” caveat because I am measuring the bounce, and a bounce must have a starting point.

If we have not yet found the final bottom of this cycle, I think we are getting close. There are many things that can go wrong, but the market is always looking to the future, beyond today’s headlines and the dour predictions of the experts. Higher rates for longer than we thought? I think that is already quoted.

Recession on the horizon? Already priced in, although a deeper-than-expected recession would shake investor confidence. Persistent inflation? Price factored in and with a slowing economy, we’ve probably seen the worst.

As of today, my worst case scenario is 3,300 for the S&P 500, which would be 7.7% below the October low. But I am not going to wait for the market to get that low before making a new purchase. I will continue to seize opportunities to pick up high-quality merchandise in defensive sectors like health care, commodities, and even some parts of the bond market like corporate IGs, municipalities, and MBS agencies, for example.

My advice is to prepare your shopping list, go slow and stay in the defensive areas of the market. Just don’t fall into the trap of trying to pick “the” background.

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Publisher’s note: The bullet points in this article were chosen by the editors of Seeking Alpha.

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