CWS Market Review – March 15, 2022

An Historically Bad Start to the Year

Yesterday was the 48th trading day of this year. So far, this year ranks as the fourth-worst start to the year on record for the S&P 500 through 48 trading days. Some of that can be blamed on the calendar since the market peaked on the first trading of the year.

Late yesterday, we came close to making a new closing low for the year, but a late-day rally helped us miss that by a whisker. The current low came one week ago, on March 8, when the S&P 500 closed at 4,170.70. I think there’s a good chance we’ll break below that soon.

What leads me to say that? The key to watch is the 50-day moving average (the blue line). This is simply the average of the S&P 500 over the last 50 days. It’s a quick and easy way of measuring the market’s momentum. Whenever the index is below its 50-DMA, as it is now, that usually means it’s a difficult market.

The stock market tends to be trend-sensitive. By that, I mean that good markets usually lead to good markets, and bad markets often to lead to more bad markets. I know that sounds obviously true, but there’s a lot of fancy math behind it. The turning points are important. This is why the 50-DMA has a decent track record. I like to call it, “the dumb rule that works well for very smart reasons.”

Another important aspect of the stock market being below its 50-DMA is that volatility tends to be much higher. For example, In the last 23 trading sessions, the S&P 500 has only had one daily gain of less than 1%. There have been lots of big up days and lots of big down days, but not many mildly good days.

Historically, most of the best and worst daily moves have come when the S&P 500 is under its 50-DMA. One of the oddities of the stock market is that so many great days have come during awful markets. Most people have it backward: it’s not that volatility causes bear markets; it’s just that bear markets are more volatile.

Volatility is not like some gremlin that sits above the market and then swoops in to cause mayhem. Instead, it’s part of the market. When prices go down, markets get jittery.

Speaking of which, today is the 89th anniversary of the Dow’s best day ever. The markets had reopened after FDR announced a four-day bank holiday. Back then, the new president was sworn in on March 4. The time off worked. The Dow soared an astounding 8.26 points. That’s peanuts today, but in 1933 it was a gain of 15.34%. In today’s terms that would be a gain of roughly 5,000 points. That record stands today.

Tomorrow is the second anniversary of the Dow’s second-biggest loss ever. The index fell 12.93% for a loss of 3,000 points. Only the 1987 crash was worse. The market plunge two years ago even eclipsed the worst one-day losses in 1929. People were definitely scared two years ago but it was a great time to invest. The Dow is up 60% since then.

A few days later, on March 18, hedge fund manager Bill Ackman went on CNBC and implored President Trump to shut down the economy. Ackman said, “America will end as we know it” unless we “completely close down the economy. Shut it down for 30 days. Hell is coming.”

Scary stuff, but Ackman was completely wrong. The market reached its low a few days later.

Obviously, the events in Ukraine are on our minds. We’re also witnessing the effects in financial markets. Last week, the price for oil shot up to $130 per barrel. Not surprisingly, some oil producers want to ramp up production. Thanks to that, or to the promise of more oil, the price has backed down. Oil is currently around $95 per barrel.

According to the latest data, prices at the pump have topped off for now. At least they’re no longer soaring. I’m sure we’ll see the impact in upcoming CPI reports. Inflation is many things, but it’s not transitory. Get used to seeing more of it.

The Fed to Raise Rates

The Federal Reserve started its two-day meeting today. The policy statement is due out tomorrow afternoon and Chairman Powell will hold a post-meeting press conference. We can almost certainly expect the Fed to announce its first interest rate increase in more than three years.

It was almost exactly two years ago that the Fed lowered rates to the floor. While the rate increase may get a lot of attention, bear in mind that it will probably be an increase of just 0.25%. The Fed is still a long way from impinging on the economy. Real interest rates, meaning adjusted for inflation, are still well into negative territory.

The Fed has a tough job right now because inflation is attacking us on three different fronts. One, naturally, is the commodity surge from the invasion of Ukraine. There’s also the supply-chain crisis. Lastly, there’s the fact that the government has thrown tons of money at the economy. The Fed isn’t responsible for all of them. Still, I wouldn’t be surprised to see inflation soon hit 10% on a trailing 12-month basis.

The sanctions taken against Russia are starting to have a major impact. The ruble has fallen off a cliff and the country is nearing a default. The country hasn’t had a foreign currency default since 1917. Tomorrow, the government needs to pay $117 million to bond holders. The country is supposed to pay in dollars, but at this hour, it’s not clear what the Russians will pay in. Maybe yuan. Maybe euros. Who knows?

Between the Russian government and its major oil corporations, the country has $150 billion in foreign currency debt. In 1998, Russia defaulted on some ruble-denominated debt.

There’s an old saying that if you owe the bank $100, then you have a problem. If you owe the bank $1 million, then the bank has a problem. While many Russia-based firms may soon be unable to pay their bills, we’ll soon learn who in the West isn’t getting paid.

Risk Is Returning

One of the keys to understanding the current market is how the Fed behaved once Covid struck. The Fed responded to Covid in the way it should have responded to the financial crisis. If you recall, in the financial crisis, the Fed dithered for some time before it realized the extent of the problem. Ben Bernanke thought it was an issue that was contained to sub-prime mortgages. Well, it wasn’t.

Once the reality of Covid became clear, however, the Fed threw everything it had to keep the economy afloat. The important aspect for investors is that the Fed radically reduced market risk for investors. That led to an enormous boom in more speculative stocks. What do Price/Earnings Ratios matter when interest rates are on the floor?

Check out this chart which compares the S&P 500 High Beta Index (black) with the S&P 500 Low Vol Index (blue). This covers from the market low of two years ago until this past November.

Low vol stocks did well, but high beta stocks tripled! It’s important to understand that the Fed’s policies caused this to happen. In a normal market, investors would be alarmed by a highly volatile stock’s market risk. But for 20 months, that didn’t exist. As a result, high beta soared.

Now, it’s payback time. Rates are going higher and the market’s focus is changing. Since November, low volatility stocks have been back in favor. This trend will probably last for several months. Now let’s take a closer look at one of my favorite low vol stocks.

Stock Focus: Silgan Holdings

This week, I wanted to highlight Silgan Holdings (SLGN), which is one of our favorite conservative stocks from our Buy List. Silgan is one of the leading makers of metal containers in the world. Boring, sure, but it’s also a very good business. By my count, Silgan has increased its earnings in 16 of the last 18 years.

In January, Silgan said that it had Q4 earnings of 79 cents per share. Wall Street had been expecting 73 cents per share. For its part, the company said that Q4 earnings would be between 69 to 79 cents per share.

For 2021, Silgan made $3.40 per share. That’s up 11% from 2020. Sales were up 17.3%. Silgan had record free cash flow of $466.1 million. Best of all, the company expects another good year for 2022.

The CEO said, “we estimate adjusted earnings per share in 2022 in the range of $3.80 to $4.00, which represents a 15 percent increase at the midpoint over record 2021 levels. Our free cash flow estimate for 2022 is estimated at approximately $350 million.”

Silgan closed today at $44.53 per share. This means that Silgan is going for less than 12 times this year’s earnings. For Q1, Silgan expects earnings to range between 80 and 90 cents per share. The next earnings report should be due out next month.

If you want to learn more about Silgan and the other stocks on our Buy List, please sign up for our premium service.

That’s all for now. I’ll have more for you in the next issue of CWS Market Review.

– Eddy

Posted by on March 15th, 2022 at 7:44 pm


The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.