Daily Research Updates
Morning Briefings
Expert market analysis delivered every morning. Stay informed with comprehensive research and data-driven insights.
China's Tariff Tango & Asia's Demographic Dilemma
After years of pressure from the bursting of its property market, the Chinese economy is showing signs of bottoming. Just to be sure, the government has announced billions in bond sales to provide added stimulus. Eric takes a look at some of the recent economic data that shows green shoots are sprouting. … Chinese stocks certainly seem to believe the worst has passed. Chinese stocks are up, forward profit margins are improving, and the forward P/E remains low compared to its history. … Melissa looks at some of the cultural reasons behind the declining birth rates in Asia and considers how AI may help stretched work forces care for an aging population.
The Federal Budget Deficit Extravaganza
The widening US deficit has raised alarm bells, particularly since it’s doing so during an economic expansion. But if inflation moderates while the economy continues to grow, we might just dodge—or at least push off—the day of reckoning. Eric takes an in-depth look at how fast the US deficit has grown and how much more it’s costing the US government. … Who’s buying all the new Treasury debt issuance? Thank money market funds buying bills. … Retail investors are benefitting from higher interest rates. … How much Treasury bill issuance is too much? A Treasury advisory committee weighs in.
Are Consumers Cracking?
Today, we look at cracks in the story that consumers are cracking. Crack proponents expect consumers to start saving more and spending less because they’ve depleted their excess saving from the pandemic years. We expect personal saving rates to stay low and consumer spending to stay high as Baby Boomers, done with paying college tuitions and mortgage loans, spend their sizable nest eggs. (Many apparently are buying big-ticket items such as light trucks, for cash!) As long as consumers’ purchasing power keeps rising along with employment and real wages, our money is on the consumer. … While consumers remain in good financial shape, inflation has depressed consumer sentiment, particularly at the gas pump. … Dr. Ed reviews “We Were The Lucky Ones” (+ + +).
Robots, Real Estate & Energy Storage
Rockwell’s March-quarter results were surprisingly weak for a beneficiary of two broad investment themes—onshoring and automation. Customers’ excess inventories were partly to blame. Now earnings are expected to decline this fiscal year. … Also: Jackie surveys the distressed office real estate market, where financing is suffering amid higher-for-longer interest rates. But leases for high-end office space are flying off the figurative shelves as companies try to entice employees back to the office. … And in our Disruptive Technologies segment: a novel approach to storing solar and wind energy, using compressed air.
Credit, Earnings & G7 Unemployment
Today, our new Chief Markets Strategist Eric Wallerstein reviews takeaways from the Fed’s latest Senior Loan Officer Opinion Survey, for Q1. With fewer banks tightening credit and more reporting improved loan demand, there’s no sign of a credit crunch. That jibes with our no-hard-landing outlook for the economy. … Joe reports that Q1 EPS is unlikely to hit a record high, but Q2 EPS will if analysts’ current estimates are on the mark. … Also: Melissa looks at the labor market challenges faced by individual G7 countries and the various ways they’re addressing worker shortages.
Earnings Are Blooming
We don’t expect any recession this year that the Fed would have to address by easing. But since some investors think that may happen, the Fed Put is back. With it comes increased risk of a stock market meltup. For perspective, we recap the three ways that recessions typically are triggered. … When recession risk is low, as now, S&P 500 forward earnings are well correlated with actual earnings as well as with the Index of Coincident Economic Indicators. Both forward earnings and the CEI index rose to record highs last week.
Almost ‘Everything’s Coming Up Roses’
Investors in both stock and bond markets are suddenly blooming with optimism. Both markets rallied on Friday’s (mostly) positive employment report, including yet another sub-4.0% jobless rate and despite some negatives in the report. Stoking the optimism, perversely, has been economic news suggesting weakening: Cheery investors have focused not on that but on the potential ramification of it, that interest rates won’t be kept higher for longer after all. Both good and bad news are being met as great news! … One fact that indeed warrants optimism: The Fed’s 2.0% inflation target has been reached by one relevant measure. … And Dr. Ed reviews “Ripley” (+).
Copper, Semis & Nvidia’s Buying Spree
The copper price has skyrocketed in recent months, but not for the usual reason of strong global growth. Instead, Jackie reports, a perfect storm of circumstances has created an unusually tight market, with uncommon supply constraints at a time of rising demand. … Also: Semiconductor companies’ March-quarter earnings reports have shown that demand for AI chips and demand for all other types of semiconductors are on two different trajectories: The former has been soaring, the latter languishing. … And in our Disruptive Technologies segment, a look inside the acquiring mind of Nvidia.
Eurozone Recovering
The European Central Bank is widely expected to start easing in June, lowering interest rates at a measured pace to prevent a weakening of the euro. But real GDP growth in the Eurozone already resumed last quarter after two quarters of contraction. Today, we look at key economic indicators, inflation statistics, and the stock market over there, which seems reasonably valued in light of forward earnings, revenues, and profit margins. … Also: The MegaCap-8’s ytd outperformance of the S&P 500—and all of its style indexes—has been a boon to the broad index so far this year.
The Great Leaps Forward & Backward
Economic indicators aren’t always indicative of what’s happening with economies. The Index of Leading Economic Indicators continues to cry “Wolf!,” as it’s been doing for more than two years. Yet no US recession is in sight. That’s confirmed by both record-high S&P 500 forward earnings and the Index of Coincident Economic Indicators. … Robust commodities price action usually indicates a strong Chinese economy. Metals prices have rebounded briskly; yet China’s economy is very weak. The fact that oil prices haven’t concurred with the presumed message of the metals suggests something else going on.
Stagflation? Not!
One quarter does not stagflation make. True, the March quarter’s real GDP growth rate was down from the December quarter’s, while inflation was up—a combination that calls to mind “stagflation.” But the current economic scenario is nothing like the stagflationary environment of the late 1970s, when the combination of anemic GDP growth and out-of-control inflation crippled economic activity. … Today, we look at data confirming that economic activity is continuing apace—with consumers consuming, housing recovering, and businesses investing—and that PCED inflation remains on a moderating track, within our target range for the year. … Also: Dr. Ed reviews “Perfect Days” (+).
Banks, Defense & AI Creep
Two regional banks’ Q1 earnings reports highlighted the drag higher interest rates are having on results and showed that office building real estate loan defaults may be manageable. Zions and Truist managements struck some optimistic notes about the future on their earnings calls, Jackie reports. And while the S&P 500 Regional Banks industry’s fundamental metrics appear to be improving, its forward P/E remains lower than usual. … Despite rampant geopolitical strife, the S&P 500 Aerospace & Defense industry’s price index has barely risen ytd. Its diverse composition of companies explains why. … And in our Disruptive Technologies segment, five novel ways AI is being employed (would you let ChatGPT plan your wedding?).
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.