80-20 Investor monthly newsletter - September 2022
August review
Investors entered August full of optimism as the “buy the dip” mentality returned to equity markets and the rally gathered momentum.
At the start of August the S&P 500 was sitting at 4150, and in my August newsletter I identified levels 4300 and 4500 as being important in determining the future direction of the rally. Yet, much of the market euphoria was built upon a narrative that the US Federal Reserve (the Fed) would no longer be compelled to hike interest rates aggressively as inflation had peaked. I cautioned that left the rally vulnerable if these assumptions were challenged.
Below I have updated my S&P 500 technical analysis chart to take account of the market moves since the start of August.
Sometimes technical analysis can work beautifully, other times it is less reliable. On this occasion we get a nice example of the former. The S&P 500 rally failed precisely near the 4300 level which almost coincided with the 200 day moving average (not shown) at the time, and also the end-of-month buy signal for the 10 month moving average indicator as mentioned in last month's newsletter.
Below is an updated version of the 10 month moving average indicator which shows the S&P 500’s failure to move above 4288 (as shown by the red line) by the end of the month - meaning that the buy signal was not triggered.
The catalyst for the market slump was the Jackson Hole Symposium at the end of August when Federal Reserve Chair, Jerome Powell, gave a hawkish assessment of the future path of the central bank’s monetary policy. This challenged the market's dovish-pivot narrative that had driven the rally in equity markets through July and August, and things quickly unravelled as a result.
Looking at the earlier technical analysis chart, there is now an argument that US equities have reestablished a downtrend dating back to the start of 2022, as “buy the dip” has turned into “sell the rip” once again. It means that US stocks (be it the S&P 500, the Dow Jones or the Nasdaq) endured their weakest August performance since 2015.
The weakness in US equities was reflected globally as shown in the chart below which illustrates the price moves of key global equity markets during August.
But it wasn't just equities that struggled in August. Bond funds tumbled as bond yields burst higher as markets began pricing in more hawkish policy decisions from central banks. The chart below shows how the 10 year US treasury yield began moving higher from the start of August. A move mirrored in other global bond markets, such as the UK gilt market.
It is no wonder then that UK corporate bond funds had their worst month in 4 years. UK gilts also had a dire month as concerns grew about the scale of government borrowing required to cope with the cost of living crisis. Not only that but the strength of the pound fell by 4.5% against the dollar during August, the worst monthly performance since the Brexit referendum in 2016. While the fall may have provided a currency boost to any US assets held within an investor's portfolio it could not stop August looking like a microcosm of the first half of 2022, when at times bonds and equities fell in tandem. And just like then the typical 60% equity / 40% bond portfolio struggled through its lack of diversification, falling by around 1.75% during August.
Yet, despite the tricky investment backdrop, it's good to see that my £50k portfolio managed to make a profit of 0.8% during August thanks to its low bond exposure and the inclusion of commodities and energy stocks. The weakening pound also provided a positive contribution to parts of the portfolio. As an aside, I will be reviewing my portfolio next week.
September Outlook
For investors the question will now be whether August is a sign of what is to come for September. If history is to be our guide then the omens aren't great, with September typically being the weakest calendar month for equity returns as shown below.
September is also likely to be much more eventful than August which, until the Jackson Hole Symposium, was relatively calm. That's because next week we get the European Central Bank's latest monetary policy decision, while the Bank of England and the Fed deliver their decisions on 15th and 21st September respectively. Markets will also pour over what each central bank says regarding the inflation outlook and the likely path of future interest rate decisions.
In addition, any economic data published throughout September will continue to be scrutinised in order to try and front-run what each central bank may decide. In that respect September will be a lot like August, so don't be surprised to see volatility pick up in currency, equity and bond markets as investors' narratives potentially change. We also have the continued prospect of geopolitical tensions in Europe and Taiwan, the ongoing problem of rising energy prices plus China's lockdowns to contend with. What that all means for the direction of markets is almost impossible to judge.
But throughout August, ignoring the noise and focusing more on objective facts helped us navigate the market. Technical analysis has proved particularly useful in making sense of market moves. My latest FTSE 100 technical analysis chart is shown below. Once again, following a fall below 7500 the index quickly tumbled to 7300, and rebounded off the historically important resistance line of 7150. If we push back above 7300 then we could head back to 7500. But if we break below 7150, then 7000 might come into play. Keep an eye on these levels.
In the US the earlier technical analysis chart of the S&P 500 shows that the S&P 500 sits on an historical line of resistance between 3920 and 3925. If the index breaks below there then it is in danger of revisiting the June lows once again. On the upside 4300 remains a major hurdle for this market in the short term.
80-20 Investor data
Now that I've updated the 80-20 Investor Best of the Best funds I will only be sending out stop loss alerts relating to these funds. If you have invested in any of August's selection that did not make it into September's Best of the Best funds you will need to monitor these yourself from now on. For those funds that remain in the 80-20 Investor Best of the Best fund selection all stop loss alerts were reset on the 1st September 2022. So the alerts will be triggered by a 5% price fall from the highest price attained by each fund during the calendar month of September.
Enjoy the newsletter
Damien Fahy
80-20 Investor & Money to the Masses founder
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