Morning Briefings
Expert market analysis delivered every morning. Stay informed with comprehensive research and data-driven insights.
On Central Bankers, Stocks & Batteries
Check out the accompanying pdf and chart collection. Executive Summary: Policymakers in both China and the UK recently have made policy 180s, abandoning their former plans. Now US financial markets seem to think economic conditions will compel the Fed to do the same, ending this round of tightening sooner rather than later. … Did the stock market’s impressive comeback rally of the past two days benefit the same S&P 500 sectors and industries as last summer’s two-month rally did? Jackie takes a look, isolating the most dramatic winners and losers of both. … And: GM and other companies are charging ahead on the development of solid-state batteries for electric vehicles. In our ongoing coverage of disruptive technologies, we highlight some of their plans.
On Valuation, Liquidity & Inflation
Check out the accompanying pdf and chart collection. Executive Summary: The S&P 500’s forward P/E has sunk practically to its historical average of 15.0. What happens to it next depends much on what happens to the economy. If our growth recession scenario continues to play out (to which we subjectively assign 60% odds), the historical average valuation likely will hold and the S&P 500 drift sideways until climbing again in 2023; if a hard-landing recession scenario unfolds (40% odds), the P/E may sink into the single digits. … On the bright side, the financial markets have plenty of liquidity to buoy valuations. … Also: We look at what inflation has been doing by two different measures, the CPI and PCED, and examine how they differ.
On Volcker 2.0, Recession & Inflation
Check out the accompanying pdf and chart collection. Executive Summary: The latest economic indicators suggest that the economy is doing better than expected—supported by consumer spending but dragged down by the housing recession—but also that inflation remains too high. That alignment increases the odds of more Fed tightening than previously expected, a higher terminal fed funds rate, and a Fed-induced hard landing. A hard landing isn’t currently our economic forecast—we see the growth recession continuing through year-end. But fears of a Fed-induced hard landing are increasing bearishness in both bond and stock markets. We are assessing whether our forecasts for both S&P 500 earnings and valuation might be too optimistic. … Also: Dr. Ed reviews “Blonde” (+).
Troubled Times In The UK & China
Check out the accompanying pdf and chart collection. Executive Summary: In the UK, fiscal and monetary policy are at odds. Massive tax cuts and new spending programs will boost government debt—aggravating inflation even as the BOE is trying to subdue it. Bond Vigilantes clearly disapprove. … In China, the real estate sector is in shambles, and the government’s investments abroad are going belly up. A messy debt restructuring looks likely. The PBOC is hustling to prop up both the falling yuan and the weakening economy, introducing new rules to discourage shorting the currency and easing monetary policy at a time when other central banks are tightening.
Recessions Here & There
Check out the accompanying pdf and chart collection. Executive Summary: The Fed is hawkish, investors are bearish, and now industry analysts are cutting their earnings estimates after FedEx’s recent warning about macroeconomic trends. ... The latest economic indicators still suggest a growth recession is underway in the US. … Over in Europe, economic prospects are dimming as the daylight hours shorten, with no gas likely from Russia this winter. Dour business sentiment in Germany suggests a broad-based recession there. … With debt limits for EU member countries suspended for another year, we expect governments to make plenty of investments, especially in digital and energy areas.
Powell’s Latest Pivot Shocks Markets
Check out the accompanying pdf and chart collection. Executive Summary: Pessimism and bearishness are widespread; from a contrarian standpoint, that spells buying opportunities for the long term. … Meanwhile, monetary tightening appears to be making headway against inflation given the dollar’s strength and weakening commodity prices. We think PCED inflation peaked in June and is on track to fall to 3.0%-4.0% next year. One more 75bps rate hike in November may be enough. … We’ve reassessed our economic and stock market forecasts given renewed Fed hawkishness. We still expect a growth recession and range-bound S&P 500, but with greater short-term downside risk. And we now see the 10-year bond yield peaking at 4.25%. … Also: A dizzying review of Powell’s recent pivots.
‘Keeping At It’
Check out the accompanying pdf and chart collection. Executive Summary: We’re in a period of global gloom, with pessimism blanketing different countries for different reasons. In the US, measures of consumer, investor, and business sentiment all have sunk recently, which the stock market mirrors. America’s despondency stems much from the Fed’s words and deeds as it attempts to corral inflation at all costs. … Today, we offer a brief review of Fed Chair Powell’s public statements over recent months, tracing his increasing hawkishness. … And: How’s the economy been holding up in the face of Fed hawkishness? So far, so good. The latest data jibe with our growth recession scenario, but the risks of a full-blown recession are obviously increasing.
Consumers, Lithium & Waves
Check out the accompanying pdf and chart collection. Executive Summary: With recession fears topping investors’ worry list, why has the cyclical S&P 500 Consumer Discretionary sector outperformed every other sector over the past two months? Jackie explores. … Also: Lithium demand is expected to surge in coming years, driven by EVs—but can supply keep up? Would-be lithium producers face daunting roadblocks. … And: A look at the latest wave in alternative energy, wave energy.
On Earnings & Central Banks
Check out the accompanying pdf and chart collection. Executive Summary: S&P 500 forward earnings works well as a leading indicator of actual results during expansions and a coincident indicator of them during recessions; the same goes for forward revenues and forward profit margins. … Our takeaways from the three forward data series add up to a flat forward earnings outlook through early next year—a rosy viewpoint amid widespread recession trepidation. Our forward earnings and P/E forecasts together suggest a range-bound S&P 500 for the rest of this year. … Also: Melissa ferrets out the policy intentions of the ECB and BOJ.
How’s Business?
Check out the accompanying pdf and chart collection. Executive Summary: Today we focus on business sales, showing how it relates to the key economic indicators that feed into our economic outlook and how it correlates with S&P 500 companies’ aggregate and forward revenues, feeding into our stock market outlook. … For the economy, we forecast a “rolling recession”—a.k.a. “growth recession”—that depresses different industries at different times but avoids shrinking the overall economy. For the S&P 500, we estimate forward EPS of $215 this year, up 3.1% y/y, and $235 next year, up 9.3%.
On Blackouts & Liquidity
Check out the accompanying pdf and chart collection. Executive Summary: Fed Chair Powell seems to be channeling his 1970s predecessor Paul Volcker—who masterfully tamed high inflation amid a severe recession. Today, we assess how August’s CPI shocker may alter the FOMC’s economic projections and policy decisions. … We expect Wednesday’s FOMC meeting to bring a 100bps hike in the fed funds rate to 3.25%-3.50% and more hawkish projections of committee members, suggesting a terminal rate this tightening cycle of 4.25%-4.50%. … For the economy, we expect the current rolling recession to continue without turning into an official recession because there is ample liquidity to avert a credit crunch. And: Dr. Ed reviews “Five Days at Memorial” (+ + +).
MegaCap-8, Strikes & Hydrogen
Check out the accompanying pdf and chart collection. Executive Summary: How the mighty have fallen. We’re talking about the eight large-capitalization stocks dubbed the “MegaCap-8,” which collectively—and most individually—have sorely underperformed benchmarks. When these behemoths swoon, most Growth portfolios feel the thud. … Also: Unions are up in arms over wages that aren’t surging as fast as inflation, and they’re feeling empowered by the tight labor market. Strikes may be coming. Jackie looks at some hot spots in various industries. … And: Don’t dismiss hydrogen as a green alternative to fossil fuels. It’s starting to look like the go-to fuel source for energy-intensive industrial processes.
Corporate Finance Review
Check out the accompanying pdf and chart collection. Executive Summary: An Austrian assessment of August’s CPI. … And: It’s time again to focus on US corporate finance. We find American businesses in great shape—with record-high profits and cash flow on income statements and solid balance sheets. The effect of the chronic labor shortage on profit margins is businesses’ biggest challenge, but workarounds are coming that should boost productivity. … Also: Progressives give share buybacks a bad name, but they play a key role in corporate finance: counteracting the dilution from stock compensation plans. … And: Both worker compensation and capital spending remain on healthy uptrends, also contrary to popular (progressive) belief. … Finally, we recap capital markets activity from Fed data.
Keeping Up With The Joneses
Check out the accompanying pdf and chart collection. Executive Summary: Q2 GDP revisions may well show that the US economy was not in a recession during H1 after all. If so, we have the consumer to thank. Consumer spending has held up well this year despite depressed sentiment and inflation-eroded purchasing power. But purchasing power soon should get a shot in the arm as wage inflation starts outpacing price inflation. … Also: A look at how much the average US household spends and on what. … News flash: “The Joneses” have been spending as though they’ve never been better off—because they haven’t! Inflation-adjusted consumption per household has been running at a record high.
What’s The Matter With Productivity?
Check out the accompanying pdf and chart collection. Executive Summary: We aren’t giving up on our “Roaring 2020s” scenario. The idea is that labor shortages should trigger capital spending on technology that boosts productivity. The pandemic derailed that train over the first three years of the decade, exacerbating the chronic labor shortage and temporarily squashing productivity growth. We expect productivity growth to resume during H2 and strengthen to peak around 3.5%-4.0% within the next few years. … Boosting this rosy scenario: US manufacturers are spending more on productivity-enhancing tech as they expand domestic production capacity—which should continue as they move out of China.
Bad Times In Europe & China
Check out the accompanying pdf and chart collection. Executive Summary: European governments aren’t about to leave their people out in the cold after Russia suspended its gas deliveries to Germany indefinitely. Jackie examines plans they’ve pulled together to keep people warm, businesses open, and utilities financially viable. … Also: China has been fighting to vanquish Covid via strict lockdowns whenever and wherever the slippery foe appears. The government’s failure to rid the country of Covid is one problem leaders will want to keep swept under the rug when the Chinese Communist Party meets in mid-October. Another is a UN report shining a spotlight on China’s outrageous human rights abuses perpetrated against Uyghurs.
Can TINAC Survive A Global Recession?
Check out the accompanying pdf and chart collection. Executive Summary: Prospects for a global recession have risen in the wake of recent geopolitical developments. Global economic indicators have been showing signs of weakness too. … If the global economy sinks into a recession, will the US economy follow suit, as typically has happened in the past? Not necessarily this time. We still expect no more than a “rolling recession” that hits different sectors at different times without an economy-wide downturn. … Our rationale for recommending overweighting US stocks in global portfolios still holds—i.e., there is no alternative country (TINAC). ... And: Joe clears up some confusion about Q2 earnings.
Back To The Old Normal?
Check out the accompanying pdf and chart collection. Executive Summary: Fed Chair Powell has put the kibosh on financial markets’ wishful thinking that the Fed will start easing monetary policy next year. How will the Fed—and investors—know when it has achieved optimal tightening, with monetary policy restrictive enough to tame inflation but not enough to touch off a recession? “Immaculate disinflation” has proven elusive in the past, but we think it’s possible today. A federal funds rate of 3.00%-4.00% might be the sweet spot, harkening back to the “Old Normal” before the 2008 financial crisis. … Also: Indicators suggest the broad economy is growing this quarter, though certain sectors aren’t. … And: Dr. Ed reviews “Candy” (+ + +).
China, Earnings & FedNow
Check out the accompanying pdf and chart collection. Executive Summary: China’s government is mobilizing to shore up the country’s struggling, debt-laden economy. New initiatives will facilitate home-buying, guarantee the debt of select private developers, make low-interest loans to banks, and provide financial backing for infrastructure projects. More may be needed. … Industry analysts still expect S&P 500 companies to log respectable earnings growth this year and next despite having lowered their sights for many. Jackie examines how and why estimates have been changing for various sectors and industries. … And better late than never: FedNow brings the instantaneous financial transactions that other countries enjoy to the US.
Earnings Matter
Check out the accompanying pdf and chart collection. Executive Summary: Will the rolling recession—which we believe is occurring now in the US economy—steamroll corporate earnings growth? Our economic outlook suggests that earnings growth could turn negative, but not by much and not for long. … We think August’s M-PMI will be telling, suggesting that both this index and S&P 500 earnings growth are getting closer to bottoming. … And: Melissa looks under the hood of the auto manufacturing industry, still challenged globally by parts-supply problems and still short on inventory. … Also: A look at various factors driving rising EV sales.
Anatomy Of A Rolling Recession
Check out the accompanying pdf and chart collection. Executive Summary: In an eight-minute talk at Jackson Hole last week, the Fed chair squawked like a true hawk and obliterated $1.2 trillion in S&P 500 market capitalization. He said bringing inflation down will be painful. He didn’t say how painful. … We don’t see an “official” recession, but a “growth recession” that rolls through economic sectors in succession while still allowing real GDP to grow overall, albeit slowly. … In fact, such a rolling recession is likely underway already. We look at how vulnerable areas of the economy are holding up.
Powell’s Latest Pivot Won’t Be His Last
Check out the accompanying pdf and chart collection. Executive Summary: Keeping track of whether Fed Chair Powell is dovish or hawkish is making us dizzy. His latest clues—dropped at last week’s Jackson Hole conference—reversed the dovish impression he’d left in July that caused stocks to rally. So stocks pivoted southward last week. … We anticipate Powell’s next pivot and potentially encouraging inflation news. … Might BEA’s upcoming H1 GDP revisions reveal that the economy grew after all, making the “technical recession” illusory? We wouldn’t be surprised. We project 1.5% GDP growth during H2 and 2.5% next year. … Also: Q2 data on S&P 500 revenues and profits show new record highs for both. … And: Dr. Ed reviews “Blackbird.”
Industrials, Russia & Robots
Check out the accompanying pdf and chart collection. Executive Summary: A heat wave and drought are prompting China to close some industrial plants in hard hit regions to preserve electricity for air conditioning. In Europe, some industrial plant owners are closing shop because surging electricity prices are battering the bottom line. Look for supply chain problems to ensue. The Eurozone’s August PMI took a hit. … A study out of Yale University contends Western sanctions are taking a large toll on Russia’s economy. We take a look. … North American companies bought more robots in Q1 than ever before. Here are some new ways robots are making companies more efficient today and a peek at what scientists are working on for the future. Pizza anyone?
Will Inflation Persist?
Check out the accompanying pdf and chart collection. Executive Summary: If inflation is peaking, definitive proof could make all the difference to the near-term direction of the stock market. It could also affect how hard the Fed pumps the monetary brakes and what that does to the economy. Our happy outlook features inflation peaking, tightening ending sooner rather than later, and the economy slowly growing. … Recent data releases provide peeks into upcoming inflation readings—and some signs that it is peaking. … Biden’s Inflation Reduction Act seems almost satirically named: The Act is more about climate than inflation, think-tanks say it will hardly move the inflation needle, and Melissa found several aspects to be downright inflationary.
Raging Debate
Check out the accompanying pdf and chart collection. Executive Summary: Today, we examine stock market sentiment—where it’s been this year and why, as well as where it might be headed. … The bulls had a good two-month run, for a host of reasons we discuss, but it might be ending as they go on the defensive for a while for a host of other reasons. … And: QE lifted the Fed’s securities holdings and the stock market followed suit during the bull market years. But does that necessarily mean the opposite will happen when QT starts to unwind those holdings in September? The bears think so, but we see reasons to differ.