Cash Still King As We Trudge Through This Bear Market

Cash Still King As We Trudge Through This Bear Market

November 04, 2022

From the desk of Vance Howard:

The markets sold off yesterday after the Fed chair’s statements about rates and their trajectory for the rest of the year. Some were surprised with hopes of a more dovish stance. I’m not entirely sure why some investors were surprised because so far Powell has been very clear that he is not going to stop until inflation starts to subside.

The markets, even after yesterday’s selloff, are not trading as bad as some think. Yes, volatility is high, but that’s to be expected with high rates and inflation being on fire. But believe it or not, the technicals look a bit better, as you can see on the chart of the S&P 500. It broke above resistance and is making lower highs on a short-term basis. There are a lot of stocks that have sold off to levels where they can be viewed as a value play. High levels of cash should be held at this time, but like we said last week it is our view that we are about 75% through the current bear market.

ADP private payrolls increased 239,000 in October, the most in three months, and above the consensus of 195,000. Nearly 90% of it, however, was concentrated in leisure/hospitality, which added 210,000 net new jobs. Payrolls in most other industries declined from the prior month, as businesses have started to pull back on hiring

Notably, manufacturing, which tends to be more cyclical and interest rate sensitive than other industries, cut 20,000 jobs, down for the second consecutive month. Additionally, jobs in some services industries have already been declining for three or more successive months. Information payrolls, a reflection of the challenges in the tech sector, fell 17,000 last month, the second most since July 2020

Annual pay growth eased slightly, but continues to run much higher than earlier in this cycle. Pay growth for job changers moderated for the third consecutive month to 15.2% y/y, but is still about double the pay growth for job stayers which was little changed at 7.7% y/y. These trends suggests that while Fed tightening may have started to ebb labor demand, the Fed’s job is not yet done, as strong pay growth may keep inflation pressures elevated for longer

Mortgage application volume continued to decline last week, as the conventional mortgage rate rose above 7.0%, its highest level since April 2002. The MBA Purchase Index fell 0.8%, reaching its lowest level since January 2015. It is also down nearly 40.0% from a year ago. It suggests continued weakness in home sales over the near-term.

The Refinance Index edged up 0.2%, its first increase in six weeks. Nevertheless, it has fallen 85.8% on a y/y trend basis and sits near its lowest level since August 2000, as mortgage rates continue to weigh on refinancing.

Vance Howard

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