09/12/2022
Last Friday, a ceremonial bell at Windsor Castle tolled 96 times, once for each year of Queen Elizabeth II's life, who passed away last week at 96. Queen Elizabeth II was the world's longest-serving monarch. The Queen was a beloved symbol of stability, kindness, and humble strength during her 70 years of rule, not only for the United Kingdom, but the entire world. Over Britain's period of national mourning, citizens of the UK, the Commonwealth, and the world as a whole will have an opportunity to reflect on the Queen's seven decades of service and duty, as well as her remarkable, quiet influence both culturally and politically. Although King Charles III assumed the monarchy of the United Kingdom the moment Queen Elizabeth died, the Accession Council formally proclaimed him the new sovereign on Saturday.
 
Over the coming days and months, the pomp and circumstance accompanying the historic transfer of power in a British monarchy will simply be unfamiliar to most of the world. According to CIA World Factbook data, nine out of ten living humans have never known a British monarch other than Queen Elizabeth II, who assumed the throne in February 1952. Roughly 19% of Britain's population and 17% of the U.S. population is age 65 or older, according to World Factbook data, and is a rough estimate of the number of people in each country who were alive before or shortly after Elizabeth's ascension. While it goes without saying the Queen ruled over an extraordinary, extended period of change in the world, her time-tested tenure is an excellent reminder for investors about the principles of sound strategy and steadfast fortitude.
 
Fifteen prime ministers served under Queen Elizabeth II, including Liz Truss, who became the latest UK Prime Minster just last week. Interestingly, over the Queen's rule, there were thirteen separate S&P 500® Index bear markets (i.e., 20% or more declines from a market top with no rallies of 20% or more in between), according to Bespoke Investment Group. One of those S&P 500 bear markets included a 50% plus decline, another where the Index declined by roughly 48%, and five bear markets where the Index lost more than one-third of its value. In economic terms, there were eleven confirmed U.S. recessions since the Queen was coronated in June 1953. In addition, thirteen U.S. presidents came and went while the Queen's monarch was in power, with the fourteenth, Joe Biden, the first to see an accession of a King.
 
Nevertheless, during Queen Elizabeth's reign, the S&P 500 advanced more than +16,000% cumulatively, or +7.6% annualized, per Bespoke. And that's before accounting for dividends, which pushes the annualized S&P 500 return to over +10.0%. Further, U.S. Real GDP per capita increased roughly three and a half times over the Queen's tenure, rising from $17,093 to $59,288, also courtesy of Bespoke. Like the Queen, with a calm and collected demeanor, investors can reap the rewards of time if they remain patient, disciplined, and humbly focused on their long-term objectives.
 
S&P 500 Ended Its 3-Week Losing Streak
          
Last week, the S&P 500 Index advanced +3.7%, snapping a three-week losing streak of at least 1.0% or more declines. The NASDAQ Composite gained +4.1%. The more narrowly focused U.S. large-cap barometer, the Dow Jones Industrials Average, rose +2.7%, while the broadest measure of U.S. small-caps, the Russell 2000 Index, popped higher by +4.0%. Before the market opened on Friday, the New York Stock Exchange observed a moment of silence for the 21st anniversary of the 9/11 terrorist attacks.
 
Growth (+4.2%) outperformed Value (+3.2%) for the first time in five weeks, with all sectors of the S&P 500 higher on the week. Only Consumer Staples and Energy rose less than +2.0% over the Labor Day-shortened week. U.S. Treasuries sold off modestly, with the curve flattening, while the U.S. Dollar Index declined by 0.5%, breaking a three-week streak of gains. However, the 10-year U.S. Treasury yield closed last Friday above 3.30%, hitting levels last seen in June. And the dollar remains just off its highest levels since 2002. Gold closed at $1,726.90 per ounce, down 0.3% on the week, and West Texas Intermediate (WTI) crude finished basically flat at $86.28 per barrel.
 
In our view, nothing of particular note drove stock prices higher last week other than some needed relief after three weeks of declines. Oversold conditions likely helped push some traders back into a buying stance, as the advance in stock prices prompted increased short-covering across momentum/technical strategies.
 
Since May, S&P 500 levels near 3,900 have generally offered some support for stocks (outside of the June lows), while the Index's 200-day moving average near 4,300 has provided resistance. Last week, the Index closed at 4,067, which sits above its 50-day and 100-day moving averages. Traders may look to test these levels over the near term to help determine if last week's rally has more legs. But with the S&P 500 trading at roughly 17x earnings over the next twelve months, stocks appear reasonably priced if profits come in as analysts expect. Yet, if analysts prove too optimistic about the earnings backdrop in the front half of 2023, we suspect stock prices could struggle as expectations reset to a slower growth reality.
 
From a sentiment perspective, retail investors remain largely cautious and in step with the potential for further volatility ahead. According to last week's American Association of Individual Investors Survey, bullish sentiment declined to its lowest reading since late April. Moreover, the number of bulls remained below its historical average for the 42nd week. Conversely, the number of investors bearish on future stock returns jumped to an eleven-week high and has remained above its historical average for 41 of the last 42 weeks. Needless to say, stock sentiment among retail investors has been very weak throughout the year.
 
Economic Data to Continue to Shape Trading
 
Other items that helped shape trading during the week included a batch of Fed speeches, namely from Fed Chair Powell to the Cato Institute and the European Central Bank (ECB) policy decision. The Fed Chair mostly retread points he made in his Jackson Hole speech, stressing the importance of keeping inflation expectations anchored. Similarly, the ECB lifted its key target rate by 75 basis points to get on top of inflation but noted in its updated economic projections the potential for a substantial slowdown in activity in the first half of 2023. In our view, central bank actions this month are likely a nonevent for asset prices. However, incoming economic data over the coming weeks and months and its influence on policy actions next year could play a much more significant role in shaping stock direction over the intermediate term.
 
Tuesday's August Consumer Price Index report will likely be this week's economic highlight. FactSet estimates call for headline consumer prices to have increased +8.1% year-over-year last month, down from July's +8.5% print. Ex-food and energy, consumer prices are expected to have risen to +6.1% in August from +5.9% the previous month. Much of the decline in the headline figure is likely to come from declining gasoline prices. However, unless inflation figures last month changed substantially more than expected, including Wednesday's update on the August Producer Price Index (PPI), we believe a 75 basis point hike from the Fed is essentially locked in at this point. On Friday, the CME's Fed Watch Tool showed a 90% chance the Fed would hike rates by 75 basis points on September 21 for the third consecutive time.
 
Thursday's August retail sales report will likely be another key report for investors this week and offer an update on consumer trends in light of falling savings rates and elevated prices. FactSet estimates suggest no change in the headline figure but point to retail sales rising in August ex-autos and fuel. Finally, reports on manufacturing and industrial production, import and export prices, and business inventories are other reports this week that could help shade the economic environment heading into next week's Federal Reserve policy meeting.
 
Important Disclosures:
 
Sources: FactSet and Bloomberg. FactSet and Bloomberg are independent investment research companies that compile and provide financial data and analytics to firms and investment professionals such as Ameriprise Financial and its analysts. They are not affiliated with Ameriprise Financial, Inc.

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An index is a statistical composite that is not managed. It is not possible to invest directly in an index.

The Standard & Poor’s 500 Index (S&P 500® Index), an unmanaged index of common stocks, is frequently used as a general measure of market performance. The index reflects reinvestment of all distributions and changes in market prices but excludes brokerage commissions or other fees.  It is not possible to invest directly in an index.

The NASDAQ composite index measures all NASDAQ domestic and international based common type stocks listed on the Nasdaq Stock Market.

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West Texas Intermediate (WTI) is a grade of crude oil commonly used as a benchmark for oil prices. WTI is a light grade with low density and sulfur content.

American Association of Individual Investors (AAII) is a nonprofit investor education organization. AAII surveys individual investors by asking them their thoughts on where the market is heading in the next six months.

The Consumer Price Index (CPI) is a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services. Indexes are available for the U.S. and various geographic areas.

The Producer Price Index is a measure that examines the weighted average change in selling prices over time that are received by domestic producers or wholesalers for their output. Changes in PPI are used to predict possible changes associated with the cost of living.

The CME FedWatch Tool analyzes the probability of FOMC rate moves for upcoming meetings. Using 30-Day Fed Fund futures pricing data, which have long been relied upon to express the market’s views on the likelihood of changes in U.S. monetary policy, the tool visualizes both current and historical probabilities of various FOMC rate change outcomes for a given meeting date. The tool also shows the Fed’s “Dot Plot,” which reflects FOMC members’ expectations for the Fed target rate over time. 

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