Morning Briefings
Expert market analysis delivered every morning. Stay informed with comprehensive research and data-driven insights.
The Lender Of Last Resort
Check out the accompanying pdf and chart collection. Executive Summary: While the Fed and FDIC have acted swiftly to contain the SVB debacle, could it still balloon into a financial crisis like previous ones that triggered a credit crunch and recession? It could if it set off a wave of disintermediation at banks broadly, but we doubt that will happen; we think the regulators’ actions will work. … So the incident doesn’t change our outlooks for the economy, stock market, or bond market. But it does revive the “Fed Put.” That’s because the Fed’s actions to stabilize the banking system also stabilize financial markets.
Run For The (Sand) Hill
Check out the accompanying pdf and chart collection. Executive Summary: Tightening monetary cycles often end abruptly when “something breaks” and a financial crisis is triggered. If the Silicon Valley Bank run is that something, it could mean tightening ends sooner and bond yields have peaked. We can’t say for sure that’s the case but can say the debacle should keep the tech sector mired in its rolling recession for longer. While the SVB crisis doesn’t change our economic and stock market outlooks for now, it adds uncertainty until resolved in a way that minimizes systemic shock. … Also: A theory for why labor market demand so persistently exceeds supply points a finger at the Baby Boomers. … Dr. Ed reviews “Till” (+ + +).
China, Defense & AI Videos
Check out the accompanying pdf and chart collection. Executive Summary: China’s economy has recovered after the country lifted its zero-Covid lockdowns. But that news has been eclipsed by the rising geopolitical tensions between the US and China. Jackie examines the escalating tensions. … Also: A look at projected defense spending in the US and China and how the S&P 500 Aerospace and Defense industry’s stock price index has been faring after a super-strong 2022. … Finally, our Disruptive Technologies segment focuses on how AI is transforming the production of movies and video games.
Profit Margin Recession?
Check out the accompanying pdf and chart collection. Executive Summary: Today, we examine S&P 500 companies’ revenues, earnings, and profit margins as reported for Q4-2022 and as estimated by industry analysts for 2023. Notably, Q4 revenues grew impressively to a record high, but inflation accounted for much of that. Operating earnings per share fell y/y, and just two S&P 500 sectors saw y/y earnings growth. Profit margins were squeezed by rising labor costs at a time of negative productivity growth. … While Q4 is behind us, its influence isn’t: It has caused analysts to chop earnings expectations for all four quarters of this year. Current 2024 estimates may prove too low if they reflect a recession that never arrives.
Selected Sectors Short Studies
Check out the accompanying pdf and chart collection. Executive Summary: Our base-case economic outlook is upbeat. Stock investors likewise seem optimistic about the economy given which S&P 500 sectors have led the index’s advance since October. We recommend overweighting five S&P 500 sectors this year: Energy, Financials, Industrials, Information Technology, and Materials. … Also: We zero in on the themes and data supporting two of these recommendations, Information Technology, which stands to benefit from companies spending on productivity-enhancing technologies in this tight labor market, and Industrials, which should benefit from strong spending on infrastructure construction, manufacturing capacity, and industrial machinery in a growing economy.
The ‘Roaring 2020s’ Revisited
Check out the accompanying pdf and chart collection. Executive Summary: Productivity was poor last year—declining more than it has since 1974—and growth in unit labor costs was high. But the final quarter of 2022 saw significant improvements in both, and we think the worst is over for both. If productivity continues to improve as companies increasingly solve their labor challenges with technological innovations, that should lead to lower inflation, higher real wages, and better profit margins. That’s the thesis of our “Roaring 2020s” outlook. … Also: The economy has been experiencing a rolling recession that started last year. Today, we examine rolling recessions, past and present. ... And: Dr. Ed reviews “The Whale” (+ + +).
Consumer Discretionary, Utilities & AI Fake Voice
Check out the accompanying pdf and chart collection. Executive Summary: Retailers are wary about the effects of high inflation and rising interest rates on consumers’ discretionary spending. But Target this year stands to benefit from easier y/y comparisons and shoppers looking for alternatives to its rapidly shrinking competitor Bed, Bath & Beyond. Jackie examines. … Also: Will demand for electricity outstrip available supply over coming years with retiring fossil-fuel-powered electricity generation replaced by less reliable green alternatives? That’s what one transmission organization projects. . … And: With voice-cloning software readily available, its potential nefarious (as well as silly) uses may spark new opportunities in identity authentication.
On Valuation & Central Banks
Check out the accompanying pdf and chart collection. Executive Summary: Today, we look at valuations for various investment style indexes. Notably, the S&P 400 MidCaps and S&P 600 SmallCaps—a.k.a. SMidCaps—haven’t been this cheap versus the S&P 500 LargeCaps since 2000. Growth and Value indexes underwent major shifts when the MegaCap-8 stocks were redistributed among them in December. Global markets have been outperforming the US MSCI. They’re collectively still cheap relative to the US. But we wouldn’t stray too far from home for long … And: The underlying structural issues keeping inflation aloft will be solved by market forces, not with monetary policy. … Also: The ECB has been tightening, but perhaps not enough yet.
The Inflation & Valuation Questions
Check out the accompanying pdf and chart collection. Executive Summary: Are stock valuations too high for our inflationary times? Admittedly, last year’s bear market didn’t maul valuations as severely as most do. But inflation has been moderating in a host of areas, which we expect to continue. And if the economy sticks to the rolling-recession script, as we think it will, stocks aren’t overvalued but fairly valued, in our opinion. … Also: For more perspective on the valuation question, we look at various valuation models’ current readings in their historical context, including a valuation model that takes inflation into account.
March Madness?
Check out the accompanying pdf and chart collection. Executive Summary: The stock market beat a hasty retreat in February, spooked by reports of January’s economic strength and the Fed’s dreaded possible reaction. So today we look at what March’s releases of economic data for February might bring. They could be bad news for the markets, but we actually expect the best—viewing January’s strength as anomalous and expecting February’s data to confirm our soft-landing outlook. Accordingly, we still think a new bull market was born last October; it’s just not bursting out of the gate as most bulls do. The market may remain volatile pending more clarity on what the Fed will do. … Also: Dr. Ed’s bearish review of “Cocaine Bear” (-).
On Earnings & Fuel Efficiency
Check out the accompanying pdf and chart collection. Executive Summary: For the S&P 500 index and many of its sectors, forward revenues are at record highs but forward earnings are below their record highs of last year. The disparity indicates a profit-margin squeeze, with several labor-cost-related sources; those stemming from pandemic aftereffects should abate in time. ... And: The fuel efficiency of automobiles has been climbing—with more miles traveled on fewer tanks of gasoline. Increasing use of electric vehicles may be driving this trend. Jackie collects the evidence from two places where EV adoption is ahead of the curve, California and Norway. It’s a nascent trend worth watching given the ramifications for global oil demand.
On US Earnings & India’s Economy
Check out the accompanying pdf and chart collection. Executive Summary: This earnings season stands out from most, and not in a good way: Hearing managements discuss their companies’ Q4 results on conference calls has sent analysts back to their spreadsheets. Consensus earnings estimates for all four quarters of this year have been falling. … Looking at valuations in the context of falling estimates suggests that the S&P 500 isn’t cheap after its runup since October. SMidCaps and overseas stocks are cheaper. ... Also: India aims to usurp China as the go-to nation for outsourcing, hoping to shed its “developing” status and become a global trade leader. But first, it may need to clean up its act.
The Fed, Consumers, China, & Fusion
Check out the accompanying pdf and chart collection. Executive Summary: FOMC sees rates headed higher for longer, but a soft economic landing remains in the cards. …. The Consumer Discretionary sector stands to profit from the drop in prices for gas, cotton, and shipping on the high seas. Lower inflation and higher wages should help, too. …. China’s politicians may hope eliminating zero-Covid policies will boost the nation’s economy. But the likely surge of Covid cases may prompt citizens to enter self-imposed isolation. …. Scientists reported a great advancement in nuclear fusion. But expect many more years of development before we’ll know if fusion will become an economically feasible way to generate carbon-free electricity.
Disinflation?
Check out the accompanying pdf and chart collection. Executive Summary: Inflation peaked in June and continued to moderate in November. The Santa Claus rally should continue unless the Fed’s Grinches get in the way. …. Small business owners still facing labor shortages and raising wages and prices. …. S&P 500 forward revenues, earnings, and margins losing their mojo. And: What if home prices don’t fall much?
The Bubble in Everything Has Burst. Now What?
Check out the accompanying pdf and chart collection. Executive Summary: The bubble in everything has burst without dire consequences so far. Surprisingly, it has been a relatively smooth transition back to the Old Normal from the New Normal. Among the biggest bubbles to pop was in the bond market. The cryptocurrency calamity hasn’t turned into a contagion. The SPAC debacle has also been contained. There is still some air in the stock market bubble, but less than there was at the beginning of the year. Home prices may get supported by a shortage of inventory.
The Call Of The Wild
Check out the accompanying pdf and chart collection. Executive Summary: A few choice negative words about consumer spending prospects from a few high-profile bank CEOs tripped up the S&P 500 last week. But on Monday, a strong NM-PMI release did the same, setting investors fretting about the very opposite: that consumer spending might be too strong. Meanwhile, the bankers are crying all the way to the bank: The S&P 500 Financials sectors’ forward revenue and forward earnings have never been higher. If investors need reassurance that the economy isn’t headed south, the Atlanta Fed’s GDPNow model certainly provides it. … Also: PPI inflation is falling relatively quickly. … And: Wage growth seems to have peaked.
On Industrials, P/Es & Chinese Protestors
Check out the accompanying pdf and chart collection. Executive Summary: The Industrials sector is outperforming the S&P 500 despite market expectations for a recession. The sector’s exposure to airlines, the defense industry, Boeing, and General Electric may continue to support its performance into 2023. … Also: The bear market has taken a bite out of most industries’ forward P/Es, especially those involved with Information Technology or Consumer Discretionary sectors. Meanwhile, forward P/Es have expanded for select industries in the defensive Consumer Staples and Health Care sectors. … And Jackie examines how technology both helped and hurt Chinese protesters.
On Bonds & Europe
Check out the accompanying pdf and chart collection. Executive Summary: Bond yields aren’t determined as much by supply and demand as they are by investor expectations regarding inflation and the Fed’s likely response to it. But it’s helpful to stay aware of the latest supply-and-demand-related developments in the bond market, which we review today. … Also: The EU has been doing a remarkable job of finding alternative fuel sources to replace energy imports from Russia. If a war-provoked energy crisis this winter causes a recession in Europe, chances seem good that it’ll be mild and brief.
Earnings Matters
Check out the accompanying pdf and chart collection. Executive Summary: Industry analysts following S&P 500 companies collectively lowered their earnings sights for this year and next when they heard Q3 earnings reports. The past three weeks have brought a reprieve in the estimate cutting, but will Q4 earnings reporting season revive it? Our soft-landing economic forecast suggests forward earnings moving sideways, not dropping, through H1-2023. … Also: PMIs correlate with the growth rates of S&P 500 earnings and revenues, and the latest readings yield insights into consumer spending patterns and inflationary pressures. … And: There’s no simple rule of thumb for when to over- and under-weight stocks of various capitalization sizes, but there are specific economic conditions that can guide the decision.
Don’t Stop Thinking About Tomorrow
Check out the accompanying pdf and chart collection. Executive Summary: We’ll be glad to put this year behind us—pessimism reigned as inflation raged, the Fed tightened, and investors revalued stocks downward. But the resultant bear market was a mild one as bear markets go. If it ended on October 12, as we believe, the S&P 500 actually was in bear-market territory—down more than 20%—for only 45 days of the 282-day span. … Next year, the economic backdrop should be more bullish as inflation moderates and rising wages outpace rising prices. We expect a soft landing, not a recession. … Longer term, we stand by our “Roaring 2020s” thesis, anticipating that labor shortages and technological advances will unleash a productivity boom.
Powell, Onshoring & Tech
Check out the accompanying pdf and chart collection. Executive Summary: Reassurance from Fed Chair Powell yesterday that the Fed would proceed on its tightening course with “moderation,” to avoid setting off a recession, was music to investors’ ears—lifting stock prices and lowering bond yields. Today, we look at the words that had such a palliative effect on markets and recap Powell’s main points, especially about inflation. … Also: Rising reshoring and FDI trends suggest a revival of US manufacturing, which will benefit supply chains and labor markets. … And: Jackie examines the reasons for tech stocks’ recent malaise.
2024 Is Coming!
Check out the accompanying pdf and chart collection. Executive Summary: As 2023 approaches and progresses, it will be the 2024 outlook that the stock market increasingly will discount. Today, we examine the stock market equation P = P/E x E, with E representing S&P 500 forward earnings, in the context of both the consensus and our expectations for earnings and the economic backdrop next year and in 2024. … Also: The inverted yield curve is predicting neither a credit crunch nor a recession, in our view. This time, it may be anticipating a hasty retreat of inflation. That could mean that the yields on both the 2-year and 10-year Treasuries are peaking.
Anxious Index
Check out the accompanying pdf and chart collection. Executive Summary: If the economy is in for a hard landing next year, it would be the most widely anticipated recession ever. The Philly Fed’s survey of forecasters, the WSJ’s survey of economists, and even the Misery Index that reflects the sum of unemployment and inflation rates point to a recession. … But we think this time is different. There’s been no broad-based credit crunch, liquidity is ample, consumer incomes are growing, multi-family housing remains strong, capital spending does too, and fiscal stimulus has been gushing. Real GDP shouldn’t contract in such an environment but grow, slowly but surely. We’re in the soft-landing camp.
2023 Is Coming!
Check out the accompanying pdf and chart collection. Executive Summary: The consensus is now bracing for a 2023 recession that tempers inflation and ends the Fed’s reign of tightening but also depresses corporate earnings, suggesting more downside for stocks’ valuation multiples. We’re more optimistic, expecting no broad-based recession but a rolling one, no continued bear market in stocks but sluggish earnings limiting their upside. … Both scenarios hinge on inflation: If it remains persistently high despite having peaked, expect a broad-based recession and all that entails. If not, the 2023 outlook will be brighter. … Also: A look at data supporting both soft- and hard-landing scenarios. … And: What the Fed might do next.
Thanksgiving In The Twilight Zone
Check out the accompanying pdf and chart collection. Executive Summary: While Covid-19 has upended life the world over, Americans have plenty of blessings to count this Thanksgiving. The US economy continues to grow, employment continues to expand, and consumers continue to spend. Although the single-family housing industry is in recession, multi-family housing starts are going strong. The auto industry is also doing well despite tighter credit conditions. Capital spending remains robust. The nasty supply-chain disruptions that had fueled high inflation appear to be over. And the US fossil fuel industry not only is meeting domestic energy needs but exporting to help meet Europe’s.