Daily Research Updates
Morning Briefings
Expert market analysis delivered every morning. Stay informed with comprehensive research and data-driven insights.
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.
Searching For Godot
Check out the accompanying pdf and chart collection. Executive Summary: The economic slowdown so far this year is not the game-changing “official” recession so widely feared. Waiting and waiting for this Godot of a recession is muting economic activity, but also inhibiting excesses. That’s why we expect any recession that does show up—a scenario we give 35% odds—to be mild and roll through the economy gradually by sector. We see a slow-growth scenario as the most likely outlook (60% odds) and an inflationary boom the least (5%). … Also: We turn our spotlight on what a rolling recession might look like and how September might treat the stock market.
Consumers, Russia & The Metaverse
Check out the accompanying pdf and chart collection. Executive Summary: With gasoline prices down in July, consumers had more money to spend on discretionary purchases, and retailers of most kinds benefited. Jackie taps Target’s Q2 results for consumer-spending trends and takeaways . … Also: Waging war in Ukraine has cost the Russian economy a great deal, but Q2 GDP contracted much less than economists expected, buoyed by the high prices that Russia’s energy exports fetched. … And: The Metaverse is hopping with diverse events—from concerts and celebrity-hosted parties to fashion shows and fine art sales. And everyone’s invited.
More On The Bulls Vs Bears Debate
Check out the accompanying pdf and chart collection. Executive Summary: Is the stock market rally since June 16 a rally within the bear market or the start of a new bull market? The answer hinges on the economic outlook. We’re in the bull camp, believing that inflation is peaking, Fed tightening is nearly over, and a recession won’t result; bears may believe the opposite. … Analysts have been cutting their estimates for earnings but not revenues, so expected profit margins have been falling. That suggests they see no recession, just more difficulty passing fast-rising costs on to customers. … Also: Peeks at the MegaCap-8’s rally impacts on the S&P 500, Senator Schumer’s wrong-headed anti-buyback stance, and alternative measures of inflation.
Why Are Oil Prices Falling?
Check out the accompanying pdf and chart collection. Executive Summary: Wondering what brought the price of gasoline and other petroleum products back down toward earth in recent weeks? Our data show it’s not Biden’s release of crude oil reserves but the effects of previously soaring prices—which depressed demand and sparked production—combined with China’s economic slowdown. … Speaking of which: Just when we thought the much-anticipated recession would be a no-show like Godot, he was spotted in China and maybe New York too. Might the US be in for a “rolling recession” à la the 1980s?
Waiting For Godot
Check out the accompanying pdf and chart collection. Executive Summary: Today, we sift through the recent economic data and recent Fed head chatter for clues to the critical question: Now that recession fears have abated for 2022, what are the odds of one in 2023? … We give 60% odds to a slow-growth scenario, with GDP growing 1.5% in H2-2022 and 2.5% in 2023; 35% odds to a recession next year precipitated by the Fed’s inflation battle; and 5% odds to a boom scenario. … Critical to the recession question is whether inflation is peaking. We think so but need to see more evidence to be sure. … And: Dr. Ed reviews “Elvis” (+ + +).
Health Care, Earnings & Uncle Sam
Check out the accompanying pdf and chart collection. Executive Summary: Today, Jackie takes the pulse of the S&P 500 Health Care sector, examining the M&A activity that has spurred it to outperform the market ytd and what the Inflation Reduction Act will mean for drug makers. … Also: A look at the 2023 earnings growth prospects of various S&P 500 sectors and industries. … And: How the Inflation Reduction Act aims to buy a greener US. … Plus: What will the newly passed CHIPS and Science Act spend $280 billion on? Lots more than chips.
Earnings & Productivity
Check out the accompanying pdf and chart collection. Executive Summary: Why are industry analysts now slashing the estimates they had raised throughout the year’s first half (even as the economy slowed)? … Why has productivity growth dropped to its weakest y/y rate since 1947? Is it simply returning to its pre-pandemic trendline? … Why has household formation suddenly rebounded? … How did landlords get so lucky as to find themselves in a “Golden Age”? … Today, we explain these economic anomalies, aided by recent data releases. … Also: With the economy in a growth recession and forward earnings starting to flatten, the valuation-led stock market rally might sputter for a while.
Around The World
Check out the accompanying pdf and chart collection. Executive Summary: Zooming out to assess big-picture data for major global economies, we conclude that Germany and China look most vulnerable to a recession next year. The US wouldn’t be immune to a global recession, but certain factors help insulate it. These include heavy capital inflows resulting from foreign investors’—correct—perception that US financial markets offer the safest harbor there is. Overweighting the US in global portfolios remains prudent. … Also: Germany’s economy faces duress this winter as heating the country becomes a challenge, and China’s economy is suffering at the hands of homegrown problems related to housing, lockdowns, and demographics.
No Recession In Labor Market
Check out the accompanying pdf and chart collection. Executive Summary: July’s surprisingly strong payroll employment report points to a strong July reading for the Index of Coincident Economic Indicators. This is good news for the economy, bad news for the fixed-income market, and mixed news for the stock market. While it squashes near-term recession fears, it ups prospective Fed hawkishness. … Within the labor market, there is unprecedented churn as people quit in record numbers for higher-paying positions elsewhere. Over half the workers in July’s employment report were hired over the past year! But consumer prices are spiraling upward along with wages, so even job-jumpers aren’t seeing much wage growth after adjusting for inflation.
Emerging Markets, Oil Refiners & Nuclear Power Plants
Check out the accompanying pdf and chart collection. Executive Summary: Today, Jackie takes us on a quick world tour focusing on emerging economies. Many are ailing, but a few offer a safe haven from geopolitical storms. So does the US with its strong dollar, huge economy, and relatively calm body politic. … Also: Oil refiners had a stellar Q2 operating at near maximum capacity to meet surging demand. The industry is on track for another year of eye-popping revenues and earnings growth. … And in the disruptive technologies department, we highlight the potential of SMRs—small modular (nuclear) reactors.
US Earnings & European Gas
Check out the accompanying pdf and chart collection. Executive Summary: Industry analysts finally have begun reining in their high earnings, revenues, and profit margin expectations. Their moves suggest that analysts collectively expect inflation to moderate but don’t anticipate a recession. … Also: Europe may face a cold, dark winter—literally and economically—if Russia doesn’t restore the natural gas flows to Europe that the EU depends on. Melissa presents a timeline of Russia’s gas-depriving moves and the responses from government and gas futures markets. … And: Soaring energy prices are dampening European consumer and business sentiment, boding ill for GDP growth and corporate earnings prospects. The only EMU MSCI sector with unscathed earnings growth expectations is Energy.
Valuation, M-PMI & Consumers
Check out the accompanying pdf and chart collection. Executive Summary: Yesterday’s M-PMI report jibed with our view that the US economy is in a growth recession with some sources of inflation abating—which is bullish for stocks. … Since we think the S&P 500 might have bottomed on June 16, we’re raising our target ranges for its price index and forward P/E multiple while keeping our earnings expectations unchanged. … Also: The recent consumer spending and saving data paint a challenging picture: The “inflation tax” has sapped consumers’ purchasing power, causing less saving and more borrowing to support essential spending. Consumer sentiment hasn’t been so negative in nine years. Nevertheless, consumers should continue to pivot from buying goods to buying services.
Switching Planets: Investors Now From Venus, Analysts From Mars
Check out the accompanying pdf and chart collection. Executive Summary: We’ve been making the case that the latest bear market might have bottomed on June 16. So far, so good. ... Just a few weeks back, industry analysts’ earnings estimates suggested they were oblivious to investors’ recession fears, and we quipped that the former was from Venus, the latter from Mars. Now it’s investors interpreting news with a rosy bias as analysts shave their estimates. … The stock market now appears to be discounting investors’ recent hopes of peak inflation, peak Fed hawkishness, and a mild recession. … Also: We examine Powell’s suggestion that monetary policy is nearly restrictive. … And: The Bond Vigilantes are from Venus now too.
All About Housing
Check out the accompanying pdf and chart collection. Executive Summary: The US housing market is undergoing a reversal of fortune. The scorching hot market conditions of six months ago have reversed, as 40% home appreciation over the past two years plus soaring mortgage rates have priced homeownership beyond many Americans’ grasp. The resultant greater demand for rental units has spurred high rent inflation. Additionally, the pool of would-be homebuyers has shrunk, more deals are falling apart before closing, motivated sellers have begun dropping listing prices, and builders are slashing prices. … Today, we look at all things housing, including how recent demographic and domestic migration trends have affected market conditions and at how market conditions are affecting homebuilders.