Morning Briefings
Expert market analysis delivered every morning. Stay informed with comprehensive research and data-driven insights.
Copper, Oil, Earnings & Australia
We often call copper “the metal with the PhD in Economics,” because its price rises and falls in step with the strength/weakness of the global economy. So why is Dr. Copper suddenly acting like the global economy is robust when it’s not? And why are soaring metals prices diverging with the also-economically-sensitive oil price? Dr. Ed has some answers. … Also: Joe reports that analysts’ Q1 estimate revisions are following the typical pattern, which suggests an earnings hook, or upside surprise, for S&P 500 companies on the whole. … And: Melissa takes us Down Under for a look at the Australian economy’s unique challenges.
Matters Of Interest
It’s widely believed that high interest rates act as brakes on economic activity. But do they? Today, we re-examine our fringe view that perhaps the economy is so strong because of high interest rates, not despite them. After all, Fed tightening hasn’t produced the expected lagged economic effects; consumer spending hasn’t flagged as it does before recessions. On the contrary, consumers are spending briskly despite higher debt-servicing costs. That’s because on the whole they benefit more from high interest rates than not, via incremental nonlabor income. … Also, the flip side of an unsustainably growing federal deficit: The interest paid by the government to consumers holding Treasury debt is a boon for the economy.
House Of Mirrors
Today, we rant about rent and the housing market. Like a fun house mirror without the fun, several housing-related forces are distorting economic activity. There’s the distortive way rent inflation is measured in the headline CPI; if the BLS’s new All Tenant Rent index were used instead, the Fed would be fighting too-low inflation! … There are the forces messing with supply and demand, depressing the supply of homes for sale (Baby Boomers aren’t moving) and elevating demand for rental units. … Housing affordability has suffered as a result, with home prices up 46% just since the lockdown ended. The good news is that new rental supply is ameliorating rent inflation. ... Also: Dr. Ed reviews “One Life” (+ + +).
Financials, The Safety Trade & Small But Mighty Particles
After the Q1 earnings reports of several big financial services firms, it’s clear that those exposed to the financial markets through brokerage and investment banking arms lucked out while large commercial banks suffered. Jackie discusses the reasons behind the divergent performances. … Riskier S&P 500 sectors were all the rage during the October-March stock market rally; now that the market’s tide has turned, will the “safe” sectors like Health Care and Consumer Staples get a turn to outperform? They haven’t during the April sell-off so far. … Our Disruptive Technologies segment focuses on the cancer-fighting promise of drug-carrying nanoparticles, so small they can boldly go where traditional drug delivery methods can’t.
Navigating Through The Fog Of War
The global economy is growing slowly, tugged along by the strength of the US economy. Certain indicators suggest improving global growth, but their messages could be deceptive: The wars are likely hiking commodity prices, and inflation is hiking the forward revenues of the All Country World MSCI. ... Similarly, the strong fundamentals and ytd share price outperformance of the MegaCap-8 are boosting the fundamentals and performances of the S&P 500 and the S&P 500 Growth index, since the group accounts for much of these indexes’ capitalizations. Joe cuts through the fog with quantification of these effects.
The Fog Of War
The geopolitical backdrop for investing is foggy with uncertainties. Israel and Iran are flailing with no strategic plan on either side, their aggressions simply reactions to the other’s provocations. Financial markets are bracing for global economic impacts by watching the price of oil, also put at risk by Ukraine’s attacks on Russian oil refineries. … Less foggy for investors is what the Fed will likely do: keep interest rates higher for longer. That could be good for stocks if the reason is economic strength, providing needed earnings support to the bull market, but bad if the reason is intractable inflation.
Inflation: The Ugly,The Good & The Bad
As the war in the Middle East escalates, it could send the oil price flying toward $100 per barrel and wipe out our expectations of continued moderation in US inflation (notwithstanding March’s anomalous CPI). … Barring that ugly scenario, our inflation outlook is good, with continued moderation to the Fed’s 2.0% target—which, notably, we wouldn’t view as justifying Fed easing this year. … But there are flies in the ointment: A few pesky elements of the inflation picture aren’t easily subdued, e.g., rent, health insurance, and auto-related costs. … Also: Dr. Ed reviews “Scoop” (+).
Onshoring, Financials & Magnetic Levitation
Federal incentives coaxing manufacturers to produce in the USA are hitting their mark. Willing takers may see up to 15% of their factory construction costs covered by Uncle Sam. Some states are sweetening the deal further. Jackie surveys how companies plan to capitalize on these offers and the impacts on the economy and the S&P 500 Industrials sector’s industries. … Capital markets were likely very kind to big banks and brokers during Q1. That may help the lagging S&P 500 Investment Banking and Brokerage industry do some catching up. … And: A new approach to magnetically levitating trains may bring costs down and make them more scalable.
The Seasons, They Go Round & Round
The Q1 reporting season should be a good one, with plenty of S&P 500 companies exceeding analysts’ expectations, Joe reports. His analysis of patterns in estimate revisions as reporting seasons approach shows the stage is set for another “earnings hook,” denoting an upside surprise. … Also boding well are the impressive results of early reporters with quarters ending in February. The greater number reporting earnings growth than revenues growth suggests improved efficiency and profit margins. … We’ve reassessed our own forecasts for S&P 500 EPS, valuation, and price targets and are making no changes. … And: Melissa reports on Canada’s lackluster economy.
A Matter Of Interest
Today, we examine a plausible and concerning scenario for the stock market: The war in the Middle East drives the price of oil above $100 a barrel. That would trigger expectations of resurgent inflation à la the 1970s, nix expectations of Fed easing this year, weigh on stocks, and push the 10-year Treasury bond yield back up to 5.00%. That’s not our outlook; we assign it only 20% odds versus 60% for our bullish “Roaring 2020s” scenario. But the prospect of $100 oil is concerning enough that we recommend overweighting the S&P 500 Energy sector and increasing positions in precious metals.
Hooray! The Recession Is Over
There was no recession last year, but the widespread expectation of one depressed certain economic activities, like hiring. With that depressant now lifted, several labor market indicators shot to record highs in March. … Consumer spending has been strong, especially by Baby Boomers and especially on services, keeping demand for service workers robust. Strong employment and wage growth in turn have boosted consumer spending. … Real average hourly earnings has resumed its long-term uptrend after stagnating during the pandemic years. … Also: A look at recent years’ heavy influx of on-the-books foreign-born workers. … And: Dr. Ed reviews “The New Look” (+ +).
Jobs, Earnings& Sweden
The widespread expectation that the Fed will lower interest rates this year is linked to the widespread expectation that the labor market will weaken. Both may be misguided. If the economy remains resilient and the labor market strong, as the latest data suggest, there’s little reason for the Fed to ease monetary policy in 2024. … Analyzing the data on industry analysts’ Q1 EPS estimate revisions and growth expectations for S&P 500 companies suggests to Joe that investors will be treated to another strong quarter. … Also: Melissa journeys to Sweden for a look at the country’s rebounding economy and sensibly valued equity market.
‘Nothing To Fear But Nothing To Fear (And Iran)’
The unforeseen pandemic briefly derailed our “Roaring 2020s” outlook early this decade. The one big potential risk to it that we had identified back in 2020 is a war between Israel and Iran that disrupts oil markets and causes oil prices to surge. The risk of that scenario is rising. It could re-escalate inflation, recalling the 1970s, and nix any chance of the Fed cutting interest rates this year. … Like the widely expected recession that never arrived last year, might monetary easing be a no-show this year? … Higher oil prices in recent days are already making bond and stock markets jittery.
The Amazing Flying Machine
The US economy is flying high and should continue to do so. It has defied the past two years’ widespread expectations that it would land hard or fall into recession. In fact, last year’s real GDP growth of 3.1% matched the 48-year average. Fiscal stimulus has helped, but the major engine has been robust consumer spending as Baby Boomers spend their wealth. With consumption per household near its record high, Americans have never been better off. … Corporate America is thriving too, with record cash flow, capital spending, and profits. … Plus, inflation by some measures is at the Fed’s 2% target. … Also: Dr. Ed reviews “Bob Marley: One Love” (+ +).
Housing, Drug Stores & IPOs
If the market for existing homes revs up as mortgage rates drop, will homebuilders be able to clear their excess inventories? Investors don’t seem worried, Jackie notes. … Also: The sole constituent of the S&P 500 Drug Retail industry, Walgreen Boots Alliance, has been through the wringer: booted from the DJIA, abandoned by its former CEO, and stripped of its investment-grade debt rating. But with a forward P/E battered to just 6, might all the misfortune be priced into the stock? ... And: With the IPO market moribund, private equity firms—and their investors—are caught in a logjam of immobile assets.
Central Banks & Profit Margins
Melissa reviews the challenges facing the central banks of Japan, China, and the Eurozone as they eye—or make—monetary policy moves. The BOJ is finally unwinding its extreme monetary ease (no more sub-zero interest rates!). The PBOC is easing in yet another attempt to revive its economy (good luck with that). And the ECB might ease its restrictive stance in June, if inflation and labor data warrant. … Joe reviews the latest trends in S&P 500 forward earnings, forward revenues—both at record highs—and the implied forward profit margin, at a 17-month high. He also shares which sectors are in profit recoveries and slumps.
More On The Return Of The Fed Put
Reading between the lines of Fed Chair Powell’s recent press conference, he seems to be reassuring financial markets that the Fed has their backs. We see that in his emphasis that labor market weakness—should it unexpectedly arise—could warrant monetary easing; inflation isn’t the only economic variable that could do so. His repeated mention of unexpected labor market weakness that would require a policy response, even while characterizing the labor market as robust with no sign of such weakness, seems to us code for: “The Fed Put Is Back.”
Another Post On Our Post-Modern Monetary Theory
Is the “Fed Put” back? Might the Fed’s assurances that interest rates will be brought down this year (as long as inflation behaves as expected) fuel irrational exuberance among investors? And what if interest rates really don’t need to come down, because the notion that they do rests on a faulty premise—the “long and variable lag” thesis? Our Post-Modern Monetary Theory suggests that monetary tightening doesn’t cause recessions because of a lagged demand-choking response of the economy. Tightening usually causes recessions when it triggers financial crises that turn into credit crunches that bring on recessions. That sequence of events is unlikely now that the Fed knows how to play Whac-A-Mole in the financial markets. … Also: Dr. Ed reviews “Masters of the Air” (+ + +).
China & South Korea
China’s economic woes are having a disinflationary domino effect on the economies of its major trading partners; the US is a case in point. The heightened trade tensions that might result could prompt those trading partners to raise tariffs on Chinese imports … Also: Melissa examines South Korea’s economy, equities market, and real estate market. None are thriving. South Korea has the world’s lowest birthrate, a shrinking population, and more than a third of seniors living in poverty; yet immigration is discouraged. But the country may be teaming up with Japan and India in a mutually beneficial alliance.
Nvidia, Refiners & Robots
With excitement over Nvidia’s AI-enabling offerings never greater than after its GTC conference this week, Jackie offers a timely word of caution: Nvidia investors would do well to keep an eye out for the peaking of the company’s forward revenues and earnings. If Nvidia’s stock follows the pattern of Cisco’s circa 2000, the shares may peak about two months after revenues and earnings do. … Also: The recent outperformance of the S&P 500 Oil & Gas Refining & Marketing index likely reflects a jump in the crack spread suggesting that refineries may outearn analysts’ expectations. … And: Meet the most humanoid robot yet, from Figure AI.
Mixed Emotions
Confidence measures among both consumers and small business owners are depressed, somewhat counterintuitively given the strength of the economy. Depressed sentiment doesn’t typically cause recessions, and the Fed has plenty of room to ease, nipping in the bud any problem it does present. A recession isn’t even in our forecast. Still, it’s worth examining why consumers and small business owners are so glum. … Consumers are troubled by the increase in prices since the start of the pandemic, though wages have mostly kept up with prices. … Small business owners may be depressed by flattish revenues and earnings growth. Their hiring is slowing along with quits.
Post-Modern Monetary Theory
Unlike in January, investors’ rate-cut expectations now appear to be in sync with FOMC members’ projections. Both seem to be anticipating two or three 25-basis-point cuts over the coming months. … Whether the apolitical Fed might time its rate cuts with any consideration for election-year politics is unclear, but we list some political considerations that it might be weighing if so. … Also: We explain the theoretical framework we use to forecast the economy. For lots of reasons, we are not proponents of Friedman’s Monetarism or Kelton’s Modern Monetary Theory, favoring instead what we call “Post-Modern Monetary Theory.”
Cisco Vs Nvidia & AI Goes To School
A quarter century ago, people saw Cisco as a way to invest in the enormous potential of the Internet. Investors bid up its shares, and purchasing managers over-ordered its products, expecting rationing since supplies were tight. What happened next wasn’t pretty. Today, people see in Nvidia—its shares and its products—the enormous promise of AI. Jackie examines whether Cisco circa 2000 represents a cautionary tale for Nvidia investors today. … Also: In our Disruptive Technologies segment, a look at the many ways AI can improve classroom learning materials, engage students, and make teachers’ lives easier.
CPI, Earnings & Taiwan
Inflation is well under control, in our opinion, as February’s CPI—excluding the anomalous shelter component—is right around the Fed’s 2% y/y target. But with retail sales suggesting strong consumer spending, the Fed needn’t rush to ease. … Also: With nearly all of the S&P 500 companies’ Q4 earnings reports now in hand, Joe observes that their collective revenues per share rose to a record high—impressive considering inflation’s decline. But the collective profit margin fell from its Q3 level, causing a q/q earnings-per-share shortfall. Four sectors contributed to the margin weakness. … And: Melissa reviews Taiwan’s economy and stock market, which have been strong notwithstanding China’s saber rattling.
As The World Churns
The US economy is outperforming most other countries, keeping the dollar strong. The global economic weakness has depressed the prices of commodities, especially oil, and helped moderate inflation. But globalization is alive and well: Export volumes are stalled, though in record-high territory. Manufacturing is recovering in most major economies and strongest in emerging ones. Most central banks are eyeing their easing options; Japan is the exception, eyeing tightening. … We think the US labor market remained strong enough last month to have boosted consumer spending. … Also: A brief world tour, visiting the economies of Germany, Japan, and China.