Daily Research Updates
Morning Briefings
Expert market analysis delivered every morning. Stay informed with comprehensive research and data-driven insights.
China, Consumers & Alzheimer’s Breakthroughs
Executive Summary: China’s property development companies are going bankrupt left and right, with real estate prices tanking and monthly residential property sales their slowest in a decade. What China needs is a US-style restructuring of its real estate market. Jackie surveys the past week’s wreckage. … Also: Consumers these days! They know what they want: Amazon products, Teslas, newly built homes, and travel. Related stocks did the heavy lifting to hoist the S&P 500 Consumer Discretionary stock price index 32% ytd. … And: Can Baby Boomers forget about getting Alzheimer’s? Maybe someday if some of the many ongoing R&D efforts targeting its eradication succeed.
Hard Landing In China, No Landing In US
Executive Summary: China’s economic pain has been the US’s economic gain, as it has lowered the prices Americans pay for goods from China, pulling US inflation lower. Today, we examine how China got into its economic morass and what policymakers there hope to do about it. … Also: With the US economy flying high and US retail sales in July up from June levels, might American consumers return China’s favor? It may be too soon to bet on a resumption of US consumers’ halted goods buying binge. … And: Joe pulls back the curtain on S&P 500 sector reclassification changes for an apples-to-apples look at technology companies’ changing market-cap representation in the index.
The 1970s All Over Again?
Executive Summary: The current alignment of economic forces—resulting in a growing economy with low unemployment, falling inflation, and stimulative fiscal policy balancing out restrictive monetary policy—seems too good to be sustainable. Is stagflation what comes next? … We doubt it. We don’t see inflation turning back up and economic growth slowing down as the decade progresses. We continue to place greater odds on “The Roaring 2020s” scenario (65% odds), a reboot of productivity driven growth à la the 1920s, than we do on “The Great Inflation 2.0” scenario (35%), a replay of the 1970s/early 1980s stagflation story.
Disinversion
Executive Summary: Is the federal budget deficit getting too big for the bond market to fund without yields moving higher? That seems to be a growing concern in both the bond and stock markets. In the past, bond yields were determined mostly by the Fed’s response to inflation, which is moderating; supply and demand didn’t matter much, but they may now. Today, we examine why this period of deficit widening is different than past ones. … We also examine two scenarios that could unwind the inversion of the yield curve—one bullish, one bearish—and recap data supporting both. … And: Dr. Ed reviews “The Man Who Saved the Game” (+ + +).
Semis, Ag & FinTech
Executive Summary: The semiconductor industry appears to be entering a heyday, with sales rising on m/m and q/q bases, though not yet y/y. Analysts’ estimates have been rising, managements have been upbeat, and investors have bid up the S&P 500 Semiconductor industry’s share price index by 79% ytd. Everyone’s enthused about the potential impact of the AI revolution on chip demand. … At the other end of the spectrum, meat processors such as Tyson Foods are down on their luck, Jackie reports. … And: Traditional banks are getting a run for their money from forays into fintech by Apple, Walmart, and other heavyweights.
Mostly About Consumers
Check out the accompanying pdf and chart collection. Executive Summary: Moody’s downgrade of several banks’ credit ratings has some investment implications: It’s bearish for Financials stocks, but only over the short term, as it will hasten M&A activity. It will facilitate the US Treasury’s ability to fund the budget deficit without increasing Treasury bond auction interest rates, supporting our belief that last year’s peak in the 10-year Treasury yield won’t be breached this year. And it drives home the point that credit conditions are tight enough, which should help deter the Fed from further tightening. … Also: A look at consumers’ credit-card usage, rent inflation, and the spending habits of an important demographic—never married singles.
Worry List Update
Check out the accompanying pdf and chart collection. Executive Summary: Most investors and analysts are newly optimistic about the economic outlook and corporate earnings prospects. Like them, we see low odds of a hard landing anytime soon. That’s notwithstanding the yield curve’s ongoing recession signal. … But six worries, should they become more worrisome, could change our sanguine stance. We’re watching closely for fallout from the US commercial real estate crisis; a reinvigorated wage-price spiral; the off chance that consumers retrench; the soaring federal deficit, which could cause Bond Vigilantes to get more vigilant; and the possibility that Fed Chair Powell might take a page from predecessor Volcker’s playbook.
Guess What?
Check out the accompanying pdf and chart collection. Executive Summary: This is ironic: Just when the most widely anticipated recession of all times is no longer widely anticipated, July’s employment report suggests that the Index of Coincident Economic Indicators is weakening. … With the consensus now elbow-to-elbow with us in the no-recession camp, our contrarian instincts are on full alert. The alternative scenarios of two prominent financial market prognosticators may give investors pause and keep the stock market treading water through September. … Also: Friday’s employment report does support a scenario of gradually moderating inflation, notwithstanding some observers’ views to the contrary. … And: Dr. Ed reviews “The Beanie Bubble” (+ + +).
Oil, Cat & Flying Cars
Check out the accompanying pdf and chart collection. Executive Summary: With US economic growth so strong and OPEC so disciplined, oil inventories are rapidly depleting. The surpluses that have tethered global oil prices over the past year will disappear next year as consumption overtakes production, forecasts the EIA. Jackie examines the reasons and the recent performance of the S&P 500 Energy sector and its component industries. … Also: The US economy’s vitality was evident in Caterpillar’s remarkable Q2, a testament to the strength of demand for building new homes, mining minerals, and constructing factories. … And in our Disruptive Technologies segment: Will cars ever fly?
Global Smorgasbord
Check out the accompanying pdf and chart collection. Executive Summary: While the economies of China and the Eurozone countries have been lethargic, with a contracting M-PMI in China and declining industrial sentiment in the EU, the US economy has been anything but. The Atlanta Fed’s GDPNow model shows Q3 GDP growth tracking at 3.9%. We’re increasingly confident about our no-landing/rolling-recovery outlook over the next 18 months, to which we ascribe 85% subjective odds. … Also: S&P 500 forward earnings continues to recover. … And Joe reports reassuring takeaways from recently released July data on analysts’ estimate revisions for earnings and revenues.
Mostly All About Inflation
Check out the accompanying pdf and chart collection. Executive Summary: Rates of inflation are a function of the business cycle as well as the monetary cycle, and there tends to be symmetry to their ascents and descents, especially for goods inflation. … The latest bout of high inflation was triggered by demand shocks resulting from the pandemic, which led to supply shocks, aggravated by the Ukraine war. … Since last summer, however, inflation in the US has been on a disinflationary trend. Deflation in China’s PPI suggests that the US could experience immaculate disinflation, i.e. lower inflation without a recession.
The Godot Recession
Check out the accompanying pdf and chart collection. Executive Summary: We’re raising the subjective odds we assign to the no-landing economic scenario through year-end 2024 (by 10% to 85%) and lowering our odds of a hard landing (by 10% to 15%). But we’re keeping close tabs on hard-landers’ latest arguments. Today, we summarize the main ones and give our rebuttals. … The biggest issue dividing the two camps is the outlook for consumer spending, representing over two-thirds of nominal GDP. If consumers don’t pull back on spending once their pandemic-related savings run out, an economy-wide recession would be a stretch. We say they won’t retrench, having other sources of purchasing power. ... And: Dr. Ed reviews “Barbie” (+).
Industrials, Tech & Identifying Humans
Check out the accompanying pdf and chart collection. Executive Summary: US government incentives offered to entice manufacturers to set up shop in the USA have hit their mark: Manufacturers in huge numbers, domestic and foreign, have been revamping their supply chains to relocate their production facilities to the US. It’s not always easy, as Jackie explains. But the boost to US economic activity is quantifiable and growing. … Also: AI is here, but all the ways it may disrupt markets are still unknown; will it dislodge the leaders in search and office software, Alphabet and Microsoft? … And: The dilemma of how to tell whether online content was human- or AI-generated has a solution, says one father of AI, involving eyeballs, orbs, and Worldcoin.
Over There & Over Here
Check out the accompanying pdf and chart collection. Executive Summary: We keep tabs on how well the world economy is faring by monitoring our Global Growth Barometer as well as the “flash” S&P Global PMIs for the major developed economies. “Soft landing” best describes what the global economy has been undergoing, while “no landing” characterizes the slowly growing US economy. … China’s economy has struggled under the weight of several problems; we doubt the leadership can fix them as promised. … In the US, the latest consumer confidence survey shows that the labor market remains strong.
Workers Of The World: Strike!
Check out the accompanying pdf and chart collection. Executive Summary: What’s on our worry list? Yesterday, we covered urban office real estate, which adds credit availability concerns to our worry list. Today, we look at the labor market, specifically the unrest fomented by the effects of the pandemic and inflation. … Labor unions have grown in might, their members are striking, and employers are being forced to meet their demands. … So we are adding a renewed wage-price spiral to our worry list, which could happen if a rebound in wage inflation leads to resurgent consumer price inflation.
Rolling Recession Rolling Over Commercial Real Estate
Check out the accompanying pdf and chart collection. Executive Summary: The urban office real estate niche of the commercial real estate market is increasingly distressed owing to the work-from-home trend escalated by Covid. But the problem is contained to the office districts of big cities, and we expect the fallout to be contained too: Sellers of distressed properties will take losses but find buyers, exposed banks will further increase loan loss provisions, increased M&A activity among small banks may result; but the problem won’t domino into a crisis of the banking system or the economy at large. … We detail why with our analysis of data from the Fed. … Also: Dr. Ed reviews “Oppenheimer” (+ + +).
Defense, China &Quantum Computers
Check out the accompanying pdf and chart collection. Executive Summary: In these geopolitically tense times, countries need to build more formidable military arsenals to deter aggressors—which for defense contractors means surging demand. Meeting it may be a challenge, admitted Lockheed Martin on its Q2 earnings call, voicing the need for a stronger supply chain; investors were swift to punish the stock. Jackie provides context with earnings and valuation data for the S&P 500 Aerospace & Defense industry. … Also: China’s real estate crisis continues to deepen. News of the most recent property developers to default has sunk China’s junk bond prices. … And: The race for quantum computing supremacy among Google, Amazon, and IBM.
(Hot) Global Soft Landing
Check out the accompanying pdf and chart collection. Executive Summary: Globally, economic growth has been on a downtrend since mid-2022 according to our Global Growth Barometer. Recent drags include the hot summer, Americans’ weaker demand for imports as they spend more on travel and other services, and headwinds in Europe and China unique to them. … Since we don’t expect the US to enter a recession anytime soon, we expect the bull market in stocks to continue. Our new S&P 500 targets for year-end 2024 and 2025 suggest the bull market has legs. … And: Joe explains the importance of the MegaCap-8’s expected earnings turnaround. With these eight stocks representing 27% of the S&P 500’s market cap, their outperformance could power the entire market higher.
Dismissing The Dismal Definition Of Economics
Check out the accompanying pdf and chart collection. Executive Summary: The conventional wisdom is that economics is the study of how best to allocate scarce resources—a dismal proposition. I disagree: Economics is all about using technology to create and spread abundance—a much more uplifting definition. The dismal framing taught in universities seems to have produced economists biased toward pessimism. Perhaps that’s why most—after ample evidence that the economy is thriving—are just starting to accept that a recession is not about to happen. … Today, we examine the consensus views of economic forecasters, including within the Fed, and supply context to their outlooks in the form of what inflation has been doing, especially wage inflation.
Transitory Inflation Sets Stage For Immaculate Disinflation
Check out the accompanying pdf and chart collection. Executive Summary: Big banks’ top managements sounded relatively sanguine about the economy as they reported solid Q2 results, though JP Morgan CEO Jamie Dimon hasn’t totally abandoned the recession storyline that spooked investors a year ago. … There are two versions of the bearish economic script now, one seeing recession at the hands of savings-drained consumers and other seeing recession at the hands of the inflation-fighting Fed. We counter these narratives with data on consumers and liquidity and by making our case for “immaculate disinflation,” the notion that disinflation doesn’t require a recession.
Travel, Banks & AI
Check out the accompanying pdf and chart collection. Executive Summary: Americans are traveling like never before, with record numbers flying to do so. Post-pandemic “revenge travel” has sent the valuations of travel-related stocks skyward too. Jackie takes a timely look at what could go wrong. … Also: Banks’ soon-to-be-released 2Q earnings will show investors whether large banks have continued to fare way better than small ones—shedding light on whether the valuations of the latter have been overly punished. The S&P 500 Regional Banks index has dramatically underperformed the S&P 500 Diversified Banks index ytd. … And: In our Disruptive Technologies segment, a look at how AI is being deployed to speed and improve drug development.
Sunny Or Cloudy Earnings Season?
Check out the accompanying pdf and chart collection. Executive Summary: We see reasons for optimism that upcoming inflation releases and Q2 earnings news will please stock investors. We expect to learn that inflation continues to moderate in response to monetary policy that’s restrictive enough. And we expect Q2 earnings to be less bad than analysts are predicting. That’s because analysts’ estimates usually are too pessimistic at the start of reporting seasons and because the macroeconomic backdrop likely provided good revenue and earnings support. We look at some of the macro influences on specific industries. … And: Joe examines analysts’ ever-changing earnings growth expectations through various lenses—by index, sector, and in the context of historical trends.
Stay Home Or Go Global?
Check out the accompanying pdf and chart collection. Executive Summary: Global stock markets have climbed a wall of worry impressively this year despite all the global headwinds—including lackluster GDP growth, high inflation, and the tightening of many central banks’ monetary policies—as well as regional headwinds in Europe and China. The markets’ resilience may reflect investors’ relief that worst-case scenarios didn’t pan out. … Japan’s stock market is a case in point. It’s been soaring despite investors’ uncertainty over the BOJ’s next move. Will this holdout among central banks at long last lift its ultra-easy monetary policy and adjust its yield curve control program accordingly?
Fully Employed
Check out the accompanying pdf and chart collection. Executive Summary: June’s newly released employment report gives us clues about June’s not-yet-released CEI, and the CEI closely tracks GDP. So from the employment report, we extrapolate that June’s CEI will likely confirm that real GDP grew around 2.0% y/y during Q2, close to the Atlanta Fed’s current prediction (2.1%). A recession is still possible if the Fed keeps tightening, but we see just a 25% chance of a hard landing. … Also: A look at our resilient labor market. Wage inflation continues to moderate, but wages adjusted for inflation have resumed their growth trend—suggesting revived productivity growth. … And: Dr. Ed reviews “The Diplomat” (+ +).
Getting Harder To Be A Contrarian
Check out the accompanying pdf and chart collection. Executive Summary: Since last summer, when conventional wisdom held that a recession was coming, we argued that one was already going on, rolling through the economy in stages instead of walloping it all at once. Now that the consensus view is moving toward no recession coming after all, and relieved investors have driven the stock market higher, our contrarian instincts are on high alert. The no-show recession could still show up, and we are on the lookout. … Today we revisit the main reasons that some respected observers still expect a recession, and we weigh in on each. The upshot: We’re not changing our (recently raised) subjective odds of a soft landing, at 75%, for now.