Daily Research Updates
Morning Briefings
Expert market analysis delivered every morning. Stay informed with comprehensive research and data-driven insights.
Your Wish Is Our Command
Check out the accompanying pdf and chart collection. Executive Summary: Our Monday webinars often don’t allow time to answer all your questions. So today’s Morning Briefing is devoted to a few recent ones. … We don’t expect much economic impact when the drawdown of the SPR ends, as we don’t foresee gasoline prices spiking as a result since tapping the SPR didn’t contribute much to the decline in prices. … Also: We counter our skeptics who expect a rampant recession, explaining why we see greater odds (60%) that the gently rolling recession already underway will continue. … And: The strong dollar should peak when monetary policymakers’ hawkishness does, to the relief of US companies with foreign-derived sales and earnings.
The Great Monetary Policy Reversal
Check out the accompanying pdf and chart collection. Executive Summary: Both the bearish and bullish cases for the stock market currently boil down to how the economy responds to the tectonic monetary policy adjustment from unconventionally ultra-easy to conventionally tight, a.k.a. “The Great Monetary Policy Reversal.” … We describe both cases, pointing out that bullish could morph into bearish if services inflation doesn’t abate. We’re in the minority as glass-half-full bulls, counting on a muted rolling recession, with rolling inflation, passing through the economy and out. … Also: Fed officials may be dialing back their hawkishness, which would support the bullish case. We think monetary policy is decidedly restrictive now already. … And: Midterm elections could energize Santa Claus rally. ... Plus: Dr Ed reviews “Eiffel” (+).
On China, Banks & Solar
Check out the accompanying pdf and chart collection. Executive Summary: China’s economy is ailing, but you wouldn’t know it to hear President Xi’s speech before the Chinese Communist Party’s annual National Congress. Jackie puts into perspective the points he made and, more importantly, the ones he omitted. … Also: Big banks’ Q3 earnings reports showcase their resilience so far in the current higher interest-rate environment, but leveraged loans could be a problem area in the future if companies have trouble making higher interest payments. ... And: A look at solar energy’s sunny future: With new technologies making panels lighter and more versatile, the sky’s the limit to their potential applications.
On Mid-Terms, Earnings & Commodities
Check out the accompanying pdf and chart collection. Executive Summary: Octobers tend to turn out decent returns during mid-term election years. Twelve bear markets have met their demise during October, often setting the stage for Santa Claus rallies. … Q3 earnings season has stumbled out of the gate, but stocks have rallied anyway. We look at which sectors and industries benefited the most and where estimate-cutting industry analysts are cutting the most. … Also: Melissa discusses how recent news from China and Europe has been affecting commodities prices.
Going Fishing
Check out the accompanying pdf and chart collection. Executive Summary: Our bond market analysis suggests that the 10-year Treasury bond yield might peak at 4.00%-4.25%, probably in November after the Fed raises the federal funds rate by 75bps and possibly in anticipation of one final 75bps hike in December that puts the terminal federal funds rate at 4.50%-4.75%. … Our stock market outlook involves the S&P 500 remaining in a volatile trading range between 3666 and 4305 for the rest of this year. ... Also: Why hasn’t the labor-force participation rate snapped back to its pre-pandemic levels now that the pandemic has abated? Melissa explores various reasons. … And: She examines trends perpetuating today’s extreme labor shortages.
Mostly All About Inflation
Check out the accompanying pdf and chart collection. Executive Summary: More persistently pernicious inflation than expected is at the root of the financial market’s bearish sentiment. Revenues, profit margins, and earnings have been holding up relatively well; the market’s big problem is a significant downward rerating of the P/E multiples that investors are willing to pay in this inflationary economic environment. ... We continue to think the economy is undergoing a rolling recession afflicting different industries at different times. We also think that inflation might be following a similar rolling script. Notably, goods inflation pressures have abated as services inflation pressures have picked up.
On Semis, Valuation & Energy
Check out the accompanying pdf and chart collection. Executive Summary: The cyclical S&P 500 Semiconductors and Semiconductor Equipment industry indexes have had a terrible week and year. … Also: The stock market’s poor recent performance has been mostly attributable to valuation resets at lower levels. Jackie finds a mixed valuation picture among sectors and industries. … And: Developments that exert upward pressure on oil prices have been countered by factors with the opposite effect; three in particular have been sapping global demand for oil lately.
The Most Widely Anticipated Recession In History
Check out the accompanying pdf and chart collection. Executive Summary: Some areas of US economy are thriving while others flounder, and several looming challenges signal tough times ahead. JPMorgan Chase’s CEO yesterday said a recession is coming. Our assessment is that a rolling recession is already here and should linger well into next year. … We’re raising our Q3 forecast for real GDP and lowering our Q4 one. … Notably, small business owners remain depressed, with inflation topping their worry list even as they’re forced to exacerbate it. … Also: Industry analysts have been continuing to lower their earnings sights; we may do the same for S&P 500 earnings this year and next depending on the strength of Q3 earnings results.
More Inflation (News) Is Coming
Check out the accompanying pdf and chart collection. Executive Summary: The financial markets have been laser focused on inflation news this year, and are bracing for the next couple of days’ releases. Thursday’s CPI report for September is bound to move the markets, and tomorrow should bring a sneak peek of what it holds in store via the PPI release, specifically its personal consumption expenditures index. … Today, we examine the inflation information available to date in preparation for the big releases. … Notably, global supply-chain pressures eased in September, and the prices-paid indexes in both manufacturing and nonmanufacturing PMIs are way down from their peaks.
Volcker 2.0 vs Bernanke 2.0?
Check out the accompanying pdf and chart collection. Executive Summary: Our current Fed chief has recently turned to Paul Volcker’s playbook to fight inflation. The risk is that he will trigger the kind of financial instability that occurred during Ben Bernanke’s term as Fed chair. Powell and his colleagues seem hellbent on further rate hikes with no pause to assess the impacts of recent ones. One Fed governor recognizes the risks of doing so but agrees with the Fed’s risky course. Another one is quite dismissive of financial stability concerns. But we see red flags in the weakness of the housing market, the negative wealth effect, and the strength of the dollar. … Also: The labor market remains robust, but wage inflation may be peaking. … And: Dr. Ed reviews “Operation Mincemeat” (+ +).
On Earnings, JOLTS & Housing
Check out the accompanying pdf and chart collection. Executive Summary: While S&P 500 forward revenues has hit successive record highs lately, the forward profit margin and forward earnings both peaked in June. Since then, forward earnings has been flat. We see more of the same for earnings given our expectation that economic growth will be close to zero in our growth recession scenario. … Also: One in three workers quit their jobs over the past year! But their ex-employers quickly rehired. We examine the reasons for the labor market’s mind-boggling pace of job churn. … And: Home affordability challenges have sent the recently hot housing market into a deep freeze. Melissa traces the causes and the effects on homebuilders.
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.