Morning Briefings
Expert market analysis delivered every morning. Stay informed with comprehensive research and data-driven insights.
Fiscal Dystopia
Check out the accompanying pdf and chart collection. Executive Summary: If Congress doesn’t increase the federal debt ceiling soon, the government will no longer be able to pay its bills. Jim Lucier of Capital Alpha Partners reports on the progress of the Limit, Save and Grow Act, which may well pass the House this week. … The government has been in such pickles before, and the debt limit usually got raised before the 11th hour and a couple of times at the 12th hour. Of course, the recent consequences of the government’s unprecedented fiscal excesses have been massive federal deficits and inflation boosted by helicopter money. But doomsday as predicted by the doomsters has yet to arrive. We examine why. … Also: Joe looks at the profit margins that analysts expect for S&P 500 sectors and industries.
The Economy Is Beige
Check out the accompanying pdf and chart collection. Executive Summary: The stock market’s resilience since October 12 in the face of Fed rate hiking reflects the economy’s resilience. Measures of breadth for industry analysts’ estimates of S&P 500 revenues and earnings have been improving since early this year, and their optimism is supported by surveys of corporate purchasing managers. … The Fed’s latest Beige Book confirms that the banking crisis hasn’t knocked the economy off its rolling-recession path. … Also: We’ve known that QT and the banking crisis exert tightening forces equivalent to some amount of federal funds rate hiking. Now the SF Fed has quantified it, finding that the “effective” federal funds rate is currently over 6%.
Yalies Yelling
Check out the accompanying pdf and chart collection. Executive Summary: Banks were tightening lending standards before the banking crisis, and the crisis has escalated that. We don’t think a credit crunch will ensue, though we’re monitoring the situation closely. But we agree with Treasury Secretary Yellen that banks’ tightening of credit conditions effectively can substitute for further Fed tightening. … To monitor the crisis, we keep tabs on the Fed’s assets and liabilities, commercial banks’ assets and liabilities, and particularly the amount of loans being made by both. … Also: Dr. Ed reviews “A Spy Among Friends” (+ + +).
Health Care, Financials & Hydrogen
Check out the accompanying pdf and chart collection. Executive Summary: Two of the S&P 500’s 11 sectors have staged impressive comebacks in recent weeks, Financials and Health Care. Jackie tells their laggards-to-leaders stories. … Also: Large banks’ sharp y/y increases in net interest income are making up for weaker areas of their business, enabling happy Q1 earnings surprises for some. NII gains likely peaked in Q4, but a reopening of the capital markets could help the industry as 2023 progresses. … And in our Disruptive Technologies segment: EVs have been heralded as the cars of the future, but it might be hydrogen powered cars that go the distance.
Construction, MegaCap-8 & Financials
Check out the accompanying pdf and chart collection. Executive Summary: Even as the rolling recession rolls through segments of the real estate market, areas of the construction industry have never been stronger. Residential construction isn’t one of them, but nonresidential and public construction each hit new record highs in February. Construction industry employment did the same in March. … Also: If industry analysts’ forecasts are on the mark, the eight MegaCap-8 companies that exert outsized influence over the S&P 500’s performance can look forward to a rebound of their collective y/y earnings comparisons starting in Q2-2023. … And: The S&P 500 Financials sector’s growth prospects improved overnight when the Transaction & Payment Processors industry was added. Joe takes a look.
Pandemic Pandemonium
Check out the accompanying pdf and chart collection. Executive Summary: The pandemic effectively accelerated the latest business cycle. Government interventions including lockdowns, rent moratoriums, stimulus payments, and ultra-easy monetary policy altered the behavior of economic actors including businesses, workers, consumers, landlords, tenants, home buyers, and home sellers. The result was a business cycle on warp speed. … Pandemic-altered consumer behavior escalated inflation, first for goods and then for services. … That disproves the theory that inflation is simply a monetary phenomenon, fully within the Fed’s power to control.
The Sky Isn’t Falling
Check out the accompanying pdf and chart collection. Executive Summary: JPMorgan CEO Jamie Dimon’s ambiguous warnings about the economy broadly and banks specifically, voiced intermittently since last summer, have probably led many an investor astray. JPM stock has soared 34% since October, and the S&P 500 has leapt 7% in the month or so since SVB imploded, with every sector participating. … One thing Dimon said is on the mark: The economy isn’t headed for a credit crunch. That’s substantiated by US banks’ balance-sheet data, which we monitor. … Another alarmist creating disconcerting background noise is Fed Governor Christopher Waller. He’s not bothered by the economy or the banking crisis but by inflation, which he says requires further tightening. We strongly disagree.
Materials, Earnings & Bricks
Check out the accompanying pdf and chart collection. Executive Summary: Banking-crisis-stoked recession fears knocked the S&P 500 Materials sector off its top-performing perch; now with those fears allayed, it’s been rebounding. Jackie examines the earnings prospects of two Materials industries, steel and copper, and the economic prospects of their biggest consumer, China. … Also: While analysts have lowered their earnings sights for S&P 500 companies collectively in recent weeks, forward earnings have risen for more S&P 500 industries than have fallen. The outlooks for travel and commodities related industries have improved the most. … And: A promising new energy storage solution comes from improbably low-tech sources that have been right under our feet: bricks and stones.
Bulls vs Bears
Check out the accompanying pdf and chart collection. Executive Summary: We’re still stock market bulls, believing that the bear market ended in October. But now that the Fed’s tightening has touched off a financial crisis, we’d defect to the bear camp IF the Fed were to keep on tightening. … While industry analysts have been lowering their earnings sights this year, that’s almost moot to stock investors, who are more focused now on next year’s better growth prospects. … Also: The current concerns of small business owners are anything but small, including inflation, labor shortages, and a possible credit crunch. … And: The MegaCap-8’s upcoming Q1 earnings reports could set the tone for the S&P 500’s performance.
The Big Lebowski
Check out the accompanying pdf and chart collection. Executive Summary: The Fed’s rate hiking may have busted something in the credit system. Specifically, the disintermediation that tightening has caused may require small banks to cut costs so deeply that merging is their only recourse. … Given this, how can the Fed fail to conclude that the federal funds rate is restrictive enough now? Pausing the tightening for a while should land the economy softly, with moderating inflation. But continued tightening would cause a hard landing and possibly even deflation. … And: You wouldn’t know there’s any landing debate going on looking just at the labor market; payroll employment is at a record high.
It Still Looks & Walks Like A Duck
Check out the accompanying pdf and chart collection. Executive Summary: The tug-of-war between the hard-landers and the soft-landers continues. The twists and turns of recent economic-outlook-impacting events have been taking investors for a ride, but our stance remains steadfastly fixed on one outcome: a soft landing of the broad economy with mini recessions continuing to roll through various sectors. … Friday’s labor market report supports our soft-landing thesis. … While hard-landers think the banking crisis will trigger a credit crunch, causing a recession, we doubt it—believing that scenario will be avoided by the actions taken by the Fed and FDIC. … And: Dr. Ed reviews “Tetris” (+ + +).
Oil Markets & AI In HR
Check out the accompanying pdf and chart collection. Executive Summary: Oil futures leapt this week after OPEC+ announced it would cut oil production. Jackie examines possible reasons for the organization’s decision and likely ramifications for Saudi Arabia, the US, and US oil producers. … Also: Judging by the 8% surge in the S&P 500 Oil & Gas Exploration & Production price index over the past week, investors expect the production cuts will mean much better 2023 earnings prospects than the declines that analysts had been expecting. … And: What can’t bots do? Our Disruptive Technologies segment focuses on the use of AI to interview job candidates.
All About Earnings
Check out the accompanying pdf and chart collection. Executive Summary: Today, we analyze the analysts, specifically industry analysts’ recent earnings and revenue estimate revision behavior. Their collective earnings estimate shaving doesn’t suggest recession jitters, in our view, even though flattish y/y revenues expectations may indicate concern about unit sales. Forward earnings remains consistent with a soft landing. … And: Analysts typically do lower their quarterly estimates as a quarter progresses, often setting the stage for a positive earnings surprise. Joe highlights the takeaways from data on earnings estimate revisions that occur in the runup to reporting seasons, including what the data say about Q1-2023.
Crosscurrents
Check out the accompanying pdf and chart collection. Executive Summary: All 11 sectors of the S&P 500 are up since October 12, which we believe was the bear market’s bottom and the start of a new bull market in stocks. Leading the charge has been the MegaCap-8 stocks, which collectively now make up nearly a quarter of the S&P 500’s capitalization and nearly half of the S&P 500 Growth index’s. … With all the focus on a prospective credit crunch, gone relatively unnoticed are two market-buoying positives: Corporate cash flow hit a record high at year-end 2022, and the global economy has been proving rather resilient.
Banking Crises, Then & Now
Check out the accompanying pdf and chart collection. Executive Summary: The S&L crisis of 1990 caused a mild, short-lived recession impacting earnings but not triggering a bear market in stocks. Conversely, we had a bear market last year but no recession (yet?). Similarly, though, the commercial real estate market was hit hard during 1990’s banking crisis and stands now in the eye of the SVB storm, since small banks—the most vulnerable—make most CRE loans. … Also: Do you wonder why consumer spending has been so resilient lately? That huge demographic cohort that disrupts the status quo at every life stage is at it again. … And: For stock traders, Joe Feshbach’s take on the market. ... Finally: Dr. Ed reviews “Godfather of Harlem” (+ + +).
Financials, Semis & The Fountain Of Youth
Check out the accompanying pdf and chart collection. Executive Summary: Financial companies have had it rough lately, but those involved in the capital markets should benefit from easy y/y comparisons this year. Jackie recaps takeaways from Jeffries’ fiscal Q1 earnings, as the early reporter may be a bellwether for the industry, as well as industrywide data and analysts’ expectations for the S&P 500 Investment Banking & Brokerage industry. … Also: The semiconductor industry downturn may finally be ending, says Micron Technology’s CEO. But semiconductor investors are already focused on 2024’s better growth prospects. … And in our disruptive technologies spotlight: a breakthrough in anti-aging science.
Churning Earnings
Check out the accompanying pdf and chart collection. Executive Summary: The SVB debacle has depressed the S&P 500 Financials sector’s market-cap share further below its earnings share. And the S&P 500 Bank Composite hasn’t ever been this cheap relative to the S&P 500 (i.e., since the mid-1980s start of the data). We liked the Financials sector before SVB imploded and like it even more since, as the fallout we expect doesn’t include systemic contagion and does include more M&A activity. … Also: While analysts have been cutting their 2023 earnings estimates for S&P 500 companies, the index’s forward earnings increasingly reflects the higher 2024 estimates and has stopped falling. ... Also: Joe discusses some impacts of Standard & Poor’s sector and industry reclassifications.
‘Yes, There Will Be Growth in the Spring!’
Check out the accompanying pdf and chart collection. Executive Summary: Stock market bears have long expected a recession, but now the prospective credit crunch that could cause one seems more plausible after the SVB crisis. … We expect that the Fed and FDIC will contain the crisis. But we do see regional banks paying higher deposit rates now to prevent disintermediation. That’s likely to hurt their profitability and prompt more cost-saving M&A activity among them. … Also: The latest batch of economic indicators supports a soft-landing scenario.
‘Is It Safe?’
Check out the accompanying pdf and chart collection. Executive Summary: The recent banking crisis has heightened fears of a recession. But still the S&P 500 is up ytd—buoyed greatly by the MegaCap-8 stocks. … The SVB debacle hasn’t changed our economic outlook, which pegs the odds of a recession at a relatively high 40%, as we’re not convinced it will lead to a credit crunch that triggers a recession. … We’ll know if the banking system isn’t as resilient as we think if we see deterioration in the Fed’s weekly H.8 data, showing the assets and liabilities of commercial banks. … So far, we think that the SVB crisis will be contained thanks to the Fed’s emergency liquidity facility. ... Dr. Ed reviews “Boston Strangler” (+).
Communication Services & AI
Check out the accompanying pdf and chart collection. Executive Summary: The S&P 500’s Communication Services sector has outperformed all ten of its counterparts so far this year, up 18% ytd. Jackie examines the constituent industries and companies that have been driving the sector’s strong showing, with a particular focus on Meta, up 68% ytd. … Also: Companies in diverse industries are harnessing the power of AI in manifold ways to help people work faster, smarter, and even more deceptively (beware of AI fakes!). This week’s disruptive technologies segment highlights some of the players in the AI space and the innovative products they’re turning out.
Looking Ahead To Earnings Season
Check out the accompanying pdf and chart collection. Executive Summary: Industry analysts and company managements have an optimism bias that blinds them to encroaching recessions. So when a recession looms, forward earnings’ reliability as an indicator of actual earnings to come falters. … While analysts have been cutting their 2023 and 2024 earnings estimates for S&P 500 companies since last summer, their expectations for next year are still higher than for this year. As long as that remains the case, forward earnings, which have been declining since last summer, soon should stop falling and start moving higher unless a recession happens. … And: S&P 500 earnings growth ex Energy sector could turn positive in Q2 as Energy de-energizes.
Giving Credit Where Credit Is Due
Check out the accompanying pdf and chart collection. Executive Summary: The spread between the 10-year Treasury bond yield and the federal funds rate inverted in November; such inversions are predictive of credit crunches and recessions. They also tend to predict financial crises that halt Fed tightening. It’s too early to credit the yield-curve inversion for calling a recession, but it was spot on in presaging a crisis like SVB. … Small banks seem vulnerable now to depositor flight, which could prompt a credit crunch impacting small businesses. … But we don’t think a credit crunch would hurt consumer spending and homebuying as much as lower interest rates will boost them. … Our message to the FOMC: Give it a rest.
Other People’s Money
Check out the accompanying pdf and chart collection. Executive Summary: Will SVB be the financial domino that sets off an economy-wide credit crunch that leads to a recession? Maybe not given the Fed’s intervention; but if so, we don’t see another Great Financial Crisis. … Why have banking crises been a recurring cause of US recessions anyway? The crux of the problem is that bankers tend to take excessive risks because it’s not their own money on the line and the government has their backs. … Also, we take close looks at: how Fed tightening has eroded the value of banks’ bond portfolios, the SVB blame game, and SVB’s economic ripple effects. … And: Dr. Ed reviews “Living” (+).
Banks, Tech & Batteries
Check out the accompanying pdf and chart collection. Executive Summary: SVB wasn’t last week’s only bank run: Two crypto-friendly banks that served as the major gateways to the crypto world also succumbed to depositors deciding to take their money and run. Jackie performs brief autopsies and looks at their impact on the crypto markets and the banks positioned to take their place. … Also: Counterintuitively at this time of economic uncertainty, the Technology sector has been outperforming the broader index since its February 2 peak. … And our Disruptive Technologies focus today is on the quest to build a better EV battery.
The Oscars
Check out the accompanying pdf and chart collection. Executive Summary: Within days of the run on SVB, the Fed has donned its “lender of last resort” cape—guaranteeing all bank deposits by all depositors (!), creating a new emergency bank lending facility, and launching a review of what went wrong at SVB. As a result, we don’t see sufficient SVB ripple effects to alter our outlooks for the economy or financial markets. … Also: Inflation has proven both more transitory (consumer goods inflation) and more persistent (consumer services) than expected, but both types have moderated lately. … And: Joe examines the S&P 500 Growth index’s comeback relative to Value after more than a year as the underdog.