It’s All Falling Apart - Holdun


S&P 500 4,057.7 -4.0%
NASDAQ 12,141.7 -4.4%
10-Year Treasury 3.04% +14bps
Bitcoin* $20,232 -5.97%

*Bitcoin performance tracked over a 7-day period ending 28th August 2022

Market Recap

Another downward move for markets as indexes ended the week with steep declines.

Markets fell over 3% on Friday, one of the worst days for stocks this year.

The most recent sell-off was sparked by an unambiguous speech by Fed Chair Jerome Powell clarifying that the central bank’s efforts to bring down inflation were far from over and would require some economic pain along the way.

It was the second weekly setback in a row for the S&P 500, interrupting the positive momentum that had lifted the index more than 17% from mid-June to mid-August.


Crude Oil WTI 23.88%
DXY(U.S) Dollar Index 13.46%
Dow Jones Industrial Average -10.0%
7-10 Year Treasury Bonds -10.51%
S&P 500 – 14.0%
NASDAQ Composite Index -22.0%


“We must keep at it until the job is done.”

And just like that, the outlook changes.

I spoke last week about the fragility of the most recent upward trend.

“We are in the interlude between inflation peaking and economic data slowing, a momentary sweet spot if you well.”

Well, the interlude is over, and the sweet spot is no more, ground to a shuddering halt by a direct and concise message of intent from Jerome Powell on Friday.

Powell’s need to raise his voice was hardly surprising. In recent weeks, investors essentially gave the Fed the middle finger as markets rebounded strongly despite the hawkish actions of the central bank to temper asset prices.

But Powell’s message on Friday couldn’t be ignored as he reiterated the Fed’s positions despite the recent drop in inflation.

“Restoring price stability will take some time and requires using our tools forcefully to bring demand and supply into better balance. Reducing inflation is likely to require a sustained period of below-trend growth. Moreover, there will very likely be some softening of labour market conditions. While higher interest rates, slower growth, and softer labour market conditions will bring down inflation, they will also bring some pain to households and businesses. These are the unfortunate costs of reducing inflation. But a failure to restore price stability would mean far greater pain.”

In short, financial conditions will have to remain tight despite sluggish long-term growth projections.

This is the clearest message from the Fed to date; acknowledging potential pain to households and businesses as the necessary evil in their fight against inflation.

The Fed has been all bark and no bit in recent years, folding at the first sight of market discomfort, but suddenly their messaging is more akin to a rabid dog. Now more than ever, they seem intent on implementing policy despite the negative implications those policies may have on asset prices. Of course, asset price protection was never listed as a primary concern for the Fed but you could have been forgiven for forgetting this over recent years.

Don’t be surprised to see more market volatility and economic pain as interest rates continue to rise in an effort to cool inflation.

Sometimes pain is for the greater good.

Biden’s Loan Forgiveness

On Wednesday, President Joe Biden announced the U.S. government will forgive $10,000 in student loans for many debt-saddled collegegoers.

Now, I have never claimed to be an expert on the inner workings of U.S. politics, and I really don’t want to get dragged into that festering melting pot of a conversation. Still, this latest move seems to be a blatant attempt to curry favour with fellow Democrats in the run-up to the November congressional elections, with little thought given to the implications of the policy outside of the political brownie points on offer. Or perhaps I’m missing something?

Loan forgiveness while fighting an acute inflation problem seems questionable at best.

But more importantly. Why forgive student loans at all when the actual problem is the cost of college?

Is this a solution for the students or the colleges?

Momentarily plastering over the problem just to hand pricing power back to colleges simply provides the potential for higher college prices in the future.

College Tuition Fee Inflation Vs CPI Inflation


College Tuition Fee Inflation Vs CPI Inflation

Source: Ritholtz Wealth

College tuition fees have already greatly outpaced CPI over the last 40 years and this latest policy simply gives colleges another lever to pull in their pursuit of higher profits.

Can a house of cards still collapse even if it’s glued together by fiscal support? Only time will tell, I guess.

Market Outlook

After clawing back over 50% of their losses, stocks are at a crossroads.

As we move away from inflationary woes toward economic growth concerns, market uncertainty will most likely result in back-and-forth trading.

As I mentioned previously, the V-shaped recoveries we have come to know and love over the last 2+ years are far less likely.

The liquidity and support that fueled previous reversals are now being stripped out of markets. Fundamentals will continue to be reset to account for this.

Expectations will need to be moderate as we enter a period of slower growth.

My View

None of the major asset classes looks overly attractive in this market over the short term. Stocks and bonds continue to reset, and the point of entry remains unclear given the risks that remain.

With that said, using any pullbacks as a chance to top up on high-quality stocks with strong free cash flow is advised. Although fundamentals are being reset as future earnings get revised downwards, many of these high-quality names are more profitable than ever and have the capital on hand to buy-up market opportunities where they see fit.

As shown below, even in periods of economic strain, these companies can still generate substantial profits.

Making Money
Profit Margins Rise to Highest Point since 1950

Making Money:Profit Margins Rise to Highest Point since 1950

Source: Bloomberg

Funding these purchases by reducing your positions in non-profitable growth is advised.

Many of the pandemic high-flyers continue to bleed out. The chart below shows how seven of these former high-flying stocks went from a combined market cap of nearly $500 billion in February 2021 to $100 billion today.

This reduction in valuation does not make these names cheap. The outlook has significantly changed, and the momentum is very much against them.

Not every company makes a comeback.


High-Flyers - Zoom, Peloton, Teladoc, DocuSign, Roku, Wayfair, Square

Supply/demand issues should keep oil prices elevated over the medium term, and higher rates for longer should maintain U.S. Dollar dominance.

Bonds continue to add to their allure as the equity risk premium gets reduced, but interest rates have yet to reach their ceiling, in my opinion. With that said, the 10-year Treasury at 3.5% seems like a solid entry point to build up long-term exposure.

While I believe that rates will be higher for longer, I don’t believe that rates can remain elevated for very long.

The current aggressive Fed policy that brings rates to these higher levels will initiate a slowdown that is only alleviated by reducing the very rates that caused the slowdown in the first place.

And round and round we go.

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