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Good riddance September: We gauge the damage in the market and get ready for October

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Seriously, good riddance to September: Between this bloodbath of a market during the day and “Dahmer” on Netflix at night, no one would blame you for feeling a sense of hopelessness as we head into the final quarter of the year. Closing out the week, the S & P 500 was tracking for about a 9% decline in September and slightly greater than 5% for the third quarter. The Nasdaq lost about 10.5% over the past month, bringing its quarterly loss to roughly 4%. Both indices are on pace to lock in their worst September since 2008. September is historically the worst month of the year for the market. The Dow Jones Industrial Average , the last soldier standing so to speak, also ultimately fell into bear market territory this month, falling nearly 9% in September and over 6% in the third quarter. Not only was this worst month for the Dow since March 2020, it was its worst September since 2002. Yep, that means this past month for the Dow was worse than September 2008 during the financial crisis. While the outlooks for stocks and the economy are bleak, Jim Cramer has pointed out recently that we’re not in a financial and market crisis like 2008 or a dot-com bubble-type crash that lasted from March 2000 to October 2002. For the quarter, the real estate and communication services sectors performed the worst, falling over 11% and 12%, respectively. Consumer discretionary and energy were the only two sectors to finish out the quarter with gains of just over 4% and 1%, respectively. As for September, no sector managed to escape the carnage, with all 11 looking to close lower for the month, led to the downside by real estate, communications services, technology and utilities. The drivers of the price action in stocks heading into October remain largely unchanged, with inflation behind the wheel and uncertainty around China’s path to reopening and Russia’s ongoing war in Ukraine riding shotgun. Inflation and the Fed As a result of inflation, we are seeing a swift reversal of the easy money policies — low interest rates and quantitative easing — that helped support risk assets for over a decade and most recently during the dark days of the pandemic. Unfortunately, this monetary policy reversal does nothing to address the supply side issues contributing to inflation. Moreover, fiscal policy isn’t helping: The Federal Reserve is seeking to suck money out of the system and put power back in the hands of employers in an attempt to cut wage inflation, while Washington has introduced several more simulative initiatives that would increase the amount of money in the system and add jobs. Though the politicians’ causes may be noble — we love the idea of investing in renewable energy — in terms of the Fed’s fight against inflation, the policies are seen as headwinds potentially forcing the Fed to act even more aggressively than it would have otherwise. Additionally, the Fed’s tightening cycle, which began with a small interest rate hike in March, has only accelerated into the fall. That’s leading to demand for dollars and causing the U.S. greenback to strengthen relative to other currencies. The result has been a stiff headwind for companies selling into international markets as U.S. goods become more expensive to foreign buyers. China Covid policy Uncertainty around China’s reopening from the pandemic continues to weigh on the U.S. stock market because East Asia represents a significant growth opportunity for many American companies. In addition, political tensions between the U.S. and China over a number of issues, including Taiwan, are leading to a reversal of the globalist agenda that helped keep inflation down — with many politicians now calling for jobs to be brought back to the United States. How far this reversal goes remains to be seen. But supply chains are being reorganized. Some jobs will make their way back to the U.S., especially those tied to industries considered to be a matter of national security. Other jobs may end up in emerging market countries. Club holding Apple (AAPL), for example, has begun shifting some production to India. Russia’s war in Ukraine Finally, there’s Russia’s unjustified war in Ukraine, which in addition to being a humanitarian crisis, is proving to be a European nightmare. It’s disrupting food and energy supply chains to the entire region. Of course, the energy market is global — and as a result, everyone is feeling the impact of this war at the pump which is contributing to global inflation. The response is threatening a global recession. What’s the answer? Should we just take our ball and go home? History would say you stay the course and stick to your discipline. As brutal as this market may be, it’s important to zoom out and acknowledge that over the long term, the reason equities have historically provided the best returns of any asset class is because investors are ultimately rewarded for taking on the risk you experience in a year like this. In fact, just look back three years — including this horrendous year — and it’s still roughly a 9% annual return from the S & P 500. Over the past five, it’s 9.5% annually. And for the last decade, you’d have a 12% annual return. Don’t let one bad year — and we are not trying to sugarcoat it, it’s really bad — keep you from seeing the longer-term rewards for taking the risk on equities. Don’t let fear rule Can things get worse from here? Sure. But don’t let the fear of things getting worse rule your investment decisions. Even if we do go a bit lower, we would still be well within the parameters of an average bear market . The absolute carnage we have witnessed at the individual stock level is providing some of the best opportunities we have seen in years for those who can stomach further volatility and stay the course. Whether your goal is to pick up accidental high-yielders for some passive income or focus on tech stocks conducting monstrous buybacks while trading at some of the lowest valuations in years, we think there are plenty of opportunities out there right now. It’s not 2000 or 2008 Lastly, for those worried that this is a dotcom or 2008-like crash, we don’t think those are the correct comparisons at the moment. The valuations coming into this downturn were nowhere near as egregious as what we saw in 2000. At the peak of the dot-com bubble, Club holding Microsoft (MSFT), the largest company by market cap back then, traded north of 80 times trailing 12-month earnings. The second largest General Electric (GE) traded at around 60 times earnings. The third largest Cisco Systems (CSCO), a Club stock, was briefly north of 230 times earnings. The fourth largest Exxon (XOM) was over 35 times earnings. The fifth largest Walmart (WMT) was trading at nearly 60 times earnings. The biggest companies — those that have the most impact on a market cap weighted index like the S & P 500 — were in the stratosphere back then, nothing like what we saw coming into 2022. As for those wanting to compare today’s environment to the Great Financial Crisis, the biggest difference is that our financial institutions — the so-called G-SIBs or global systemically important banks — are much better capitalized than they were back then. It’s something that James Gorman, CEO of Club holding Morgan Stanley , told Jim in an interview on Thursday. Looking back Exiting the quarter, the U.S. dollar index stands at around the 112 level. Gold climbed back to around the $1,670 per ounce region. WTI crude prices are bouncing around $80 per barrel. The 10-year Treasury yield was holding around 3.8% and the 2-year yield was roughly 4.3%. While still elevated, bond yields were off their recent highs. While no portfolio companies reported earnings this past week, there was tons of economic data. On Tuesday, durable goods orders were shown to have declined 0.2% monthly in August, slightly better than expectations for a 0.3% monthly decline. New home sales in August were at a seasonally adjusted annual rate of 685,000, exceeding expectations On Wednesday, pending home sales were indicated to have declined 2% in August, missing expectations for a 1.4% monthly decrease. On Thursday, the final read on second quarter real GDP pointed to a 0.6% annualized contraction, in line with the reading we got on the second estimate but better than the 1.6% rate of contraction we saw in the first quarter. Initial jobless claims for the week ending Sept. 24 came in at 193,000, a decrease of 16,000 from the prior week and fewer than expected. On Friday, the core PCE price index — the Fed’s preferred measure of inflation — advanced 0.6% monthly in August, ahead of the 0.5% estimate. On an annual basis, it advanced 4.9%, an acceleration from the 4.7% rate of advance seen in the 12-month period ending in July. While the reading may be supportive of the still hawkish tone we have heard from Fed officials in recent weeks, the Chicago PMI reading for September came in at 45.7 — the lowest reading since June of 2020, which was the last time in was in contraction territory. As a reminder, when it comes to PMI readings, anything over 50 is consider expansion while under the 50 level indicates a contraction. Jim provided some additional thoughts on recent Fed talk and the divergence between the core PCE price index reading and Chicago PMI reading during Friday’s Morning Meeting . What’s ahead Next week, we will get earnings from Club holding Constellation Brands (STZ) before the opening bell on Thursday. Here are some other earnings reports and economic numbers to watch ahead of the Fed’s November policy meeting. As of Friday , another 75-basis-point hike was being favored by the market, with odds of a smaller 50-basis-point increase around 46%. Like August, the Fed does not have a scheduled meeting in October . Monday, Oct. 3 Before the bell: Nucor (NUE) 10:00 a.m. ET: ISM Manufacturing Tuesday, Oct. 4 Before the bell: Acuity Brands (AYI) After the bell: SMART Global (SGH) 10 a.m. ET: Factory Orders Wednesday, October 5 Before the bell: RPM International (RPM), Helen of Troy (HELE), Byrna Tech (BYRN), Lamb Weston (LW) 8:15 a.m. ET: ADP Employment Survey 10 a.m. ET: ISM Services Thursday, October 6 Before the bell: McCormick & Co (MKC), Conagra Brands (CAG), AngioDynamics (ANGO) After the bell: Levi Strauss (LEVI), Accolade (ACCD) 8:30 a.m. ET: Initial Jobless Claims Friday, October 7 Before the bell: Tilray (TLRY) 8:30 a.m. ET: Nonfarm Payrolls (Jim Cramer’s Charitable Trust is long AAPL, MSFT, MS, AMZN, CRM, HON, EL, DIS and STZ. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.

Traders work on the floor of the New York Stock Exchange (NYSE) in New York City, September 27, 2022.
Brendan McDermid | Reuters

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