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Amidst these confusing economic signals, investors will be watching closely in coming weeks as corporations report their earnings for the third quarter. At the start of 2022, analysts were generally predicting earnings growth of about 10%.   Looking ahead, they now expect earnings growth of 6% for Q3 and Q4 2022. Fitch Ratings has said corporate earnings trends, historically a leading indicator of recessions, will continue to weaken through 2023.

We always look carefully at Price/Earnings ratio. The forward 12-month P/E ratio is now 17.8. – as compared to over 20 in the past two years. So stocks are now more reasonably priced but still higher than the 100 year average of 15.9. The effect of lower corporate earnings on this ratio going forward remains to be seen.

At Hudson Advisors, our concern is that a material slowdown in economic growth has not yet been fully priced into stocks, and there will be more volatility as that happens. As stated, we expect stocks to remain in their current trading range for the next six months. We also will not be surprised if stocks dip lower for a period until the economic picture becomes clearer and more positive. One ray of hope is that the U.S. stock market will be more attractive than most international markets.

Equity Market: The stock market had rallied in July and early August based upon some evidence that inflation might be abating. That optimism was dashed when the Fed moved ahead with three rate hikes that brought the short-term rate to 3.25%. The Fed was tough with its words and actions on the need to squash any inflationary spiral. The market then tumbled for the rest of the quarter putting U.S. stocks on path to their worst year since the fiscal crisis of 2008.  

The S&P 500 ended the third quarter with a decline of 4.88%. and was down 23.87% for the year-to-date. The Dow Jones Industrial Average was off 6.88% for the quarter and 19.89% for the year-to-date.  The Russell 2000 was down 2.9 % for the quarter and 25.1% for the year. The worst performer was the Nasdaq Composite which was down 3.9% for the quarter and 32% for the year. The market has fluctuated in the early days of October.

Preferred Equities: As always, despite market conditions, we look for long-term equity opportunities. Our focus is on companies that can weather both the short-term period and flourish in a longer time frame. We want fundamentally sound companies with reasonable valuations and that pay dividends. In that context, we are looking at these sectors:

HEALTH CARE: This sector has proven to be economically resilient and has provided good returns historically.  

UTILITIES: Companies in this sector have provided consistent earnings and good dividends.

TECHNOLOGY: We are interested in selective technology companies with emphasis on innovation, especially those helping to build out 5G infrastructure.

CONSUMER STAPLES: Some of these companies can actually do well in an inflationary environment where consumers stick to basics like food and household items.

FINANCIALS: Higher interest rates can improve banking net interest income and we are interested in regional banks.

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