Stableford Capital Insights

Stableford Market Commentary: June 2022

Continued Fed Hawkishness Drives Equities Lower and Rates Higher

In the face of rising inflation, the Fed turned increasingly hawkish, which pushed 10 Year US Treasury rates up seventeen basis points to 3.02% in June.[caption id="attachment_3862" align="aligncenter" width="926"]

Bond Yields Up 17 bps to 3.02%

Exhibit 1 - Bond Yields Up 17 bps to 3.02%[/caption]While this was much lower than the 3.48% achieved in mid-month, the fear of continuing higher rates was enough to push equities down 8.8% in June.[caption id="attachment_3863" align="aligncenter" width="940"]

Equities Fell

Equities Fell 8.8% in June[/caption]

Equity Performance

Interestingly, while contracting forward PE multiples have driven much of the equity performance to date, earnings expectations have remained firm. However, a closer look reveals that while the headline earnings numbers remain above their starting point at the beginning of the year, Energy and Materials are driving all the strength. As Exhibit 3 shows, earnings expectations are falling in the soon-to-be-reported Q2 and Q3, ex these two sectors.[caption id="attachment_3864" align="aligncenter" width="976"]

Earnings Expectations Are Falling Ex Energy and Materials

Exhibit 3—Earnings Expectations Are Falling Ex Energy and Materials[/caption]From here, the key for equities is how deep the cuts to forward earnings get and what is the Fed reaction. Equities are assuming some negative adjustments to earnings already. However, if forward guidance during earnings season is worse than expected, we’re likely to see continued weakness. Potentially offsetting this would be any change in stance by the Fed. If investors start to see cracks in “peak Fed hawkishness” Treasury Yields will start to drop and higher multiples will be applied to future earnings.

Signs Inflation Will Begin to Slow

Along those lines, there are some signs that inflation will begin to slow. As Exhibit 4 shows, the Commodity Research Bureau BLS Spot Raw Industrials Index (which follows the basic materials used in the production of goods) has already dropped nearly 11% from its high through the end of June. Should this continue, it will begin to flow through to finished goods.[caption id="attachment_3865" align="aligncenter" width="940"]

Raw Industrial Materials Pricing Down 11%

Exhibit 4—Raw Industrial Materials Pricing Down 11%[/caption]

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SUBSCRIBE TO OUR COMPLIMENTARY STABLEFORD MARKET BLASTThis market commentary was written and produced by Stableford Capital, LLC. Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested in directly. The views stated in this letter are not necessarily the opinion of any other named entity and should not be construed directly or indirectly as an offer to buy or sell any securities mentioned herein. Due to volatility within the markets mentioned, opinions are subject to change without notice. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed. Past performance does not guarantee future results.S&P 500 INDEX: The Standard & Poor’s 500 Index is a capitalization-weighted index of 500 stocks designed to measure the performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

Justin Thomas
Justin C. Thomas has worked for over 15 years as a portfolio manager and analyst managing institutional assets for hedge funds and large financial institutions. Career highlights include 8 years as an equity analyst and portfolio manager at PartnerRe Asset Management, a global reinsurance company with $17 billion in assets under management, and prior to that managing a long-short equity portfolio for Citigroup’s proprietary account. Justin has also worked as an analyst at long-short hedge funds and in research for Montgomery Securities (Bank of America Securities). In addition, Justin Thomas gained operational experience while working in finance and operations at E-Stamp, a start-up in Silicon Valley. He began his career working as a CPA at KPMG. Justin has an MBA and Masters in Accounting from Northeastern University and an undergraduate degree in Economics from Tufts University.