Morning Briefings
Expert market analysis delivered every morning. Stay informed with comprehensive research and data-driven insights.
A Recession: To Be or Not To Be?
Check out the accompanying pdf and chart collection. Executive Summary: The latest batch of leading economic indicators suggests weaker coincident indicators to come. As a result, we’re raising our odds of a shallow, short-lived recession in the US economy to 55% (from 45%). That makes a recession now our base-case scenario from which we derive our earnings and stock market forecasts. … Higher recession odds lower our expectations for what S&P 500 companies will earn, what investors will pay for their stocks, and where the S&P 500 price index may stand at year-ends 2022 and 2023. … Also: Melissa looks at the factors contributing to global food inflation and the regions most vulnerable to food shortages.
The Second Half of 2022
Check out the accompanying pdf and chart collection. Executive Summary: The US economy is probably heading into a mild recession, recent indicators suggest. We now see real GDP contracting by 1.9% this year. … The good news: The recession should be over next year and should slow the rate of inflation in H2-2022 and 2023. The sooner the business cycle bottoms, the sooner the stock market will. … Analysts will be getting the recession memo shortly and cutting their estimates accordingly. We’re doing so now, lowering our earnings estimates for S&P 500 companies this year and next.
Health Care, Finance & Batteries
Check out the accompanying pdf and chart collection. Executive Summary: The S&P 500’s Health Care sector is pumped: It has outperformed most other sectors ytd and is tied for first place (with Utilities) measured since the S&P 500’s recent low on June 16. Jackie parses the opportunity, examining the investment pros and cons of the sector overall and of specific industries and companies within it. … Also: Which fintechs deserve master accounts with access to the Fed’s payments system? A couple of recent controversies put that question front and center as the Fed works on rules to govern the process of granting master accounts. … And: A look at where Tesla is going with its battery technology.
Relative Valuation & Dalio’s Big Short
Check out the accompanying pdf and chart collection. Executive Summary: Around the world, as inflation concerns, interest rates, and recession fears have risen, stock market valuations have fallen. They’ll fall further if recessions actually materialize. Against this backdrop, we examine how the valuations of various indexes have fared relative to one another. … Also: For Europe, recession appears particularly likely given a brewing energy crisis, as Russia has been choking off natural gas supplies. Melissa assesses the ramifications for European households and businesses. … And: The ECB’s hawkish turn has hurt most EMU MSCI sectors’ valuations; we take a look at the deterioration relative to analysts’ still-strong earnings and margin expectations.
Right & Wrong Tracks
Check out the accompanying pdf and chart collection. Executive Summary: This year’s first half has been treacherous for most investors; what will the second half bring? Today, we take stock of what’s going right for the economy and financial markets—and may be bullish over the rest of the year—and what could prolong the bearish pain. … Among the bullish: sentiment indicators’ contrarian buy signals, super-low joblessness, strong bank balance sheets, the “CFO Put,” and (counterintuitively) the Fed’s QT. … The main bearish scenario is a familiar fear: Inflation proves so intractable that the Fed tightens to the point of recession, which sets off a credit crunch. And that’s not all that could morph bearish.
Green Bad Deal
Check out the accompanying pdf and chart collection. Executive Summary: The best laid plans of climate activists have gone majorly awry: Soaring fossil fuel prices haven’t increased demand for and supply of “clean” energy sources, as they’d expected, while demand for fossil fuels exceeds supplies. And activists’ pressure on European governments to suppress production of fossil fuels has really backfired, creating an unholy dependence on Russian oil with dangerous geopolitical ramifications. As a result, fossil fuel sources are making a remarkable comeback. … Also: US analysts still haven’t gotten the recession memo, blithely raising estimates even though investors and managements alike are girding for the worst. Even analysts overseas have on rose-colored glasses, particularly in Europe where the risk of a recession is rising as energy shortages worsen.
Energy, EVs & Crypto
Check out the accompanying pdf and chart collection. Executive Summary: The price of oil has begun to come down. But countervailing forces are exerting both downward and upward pressure on oil prices. Among the former, production has ramped up greatly. Jackie examines the dynamics affecting oil industry pricing. … And: Electric vehicles are gaining traction in the marketplace. But they’re costing more to make with commodity prices so high and costing more to buy with manufacturers passing their cost increases onto consumers. … Also: Many of the many cryptocurrency players are bound to succumb to hypothermia during the brutal industry contraction dubbed “crypto winter.”
The Latest Business Cycle
Check out the accompanying pdf and chart collection. Executive Summary: The Census Bureau’s monthly “Manufacturing and Trade Inventories and Sales” report is chock-full of valuable information that often goes unnoticed by the media and economists alike. Last week’s release, with data through April, shows inventories starting to rise relative to sales, especially among retailers. That implies good and bad news—good for constraining inflation, bad for economic growth, increasing the risk of a goods-led recession. … And: With global inflation surging, are the major global central banks tightening with Fed-like fervor? Not exactly. Melissa examines the unique issues in Europe, Japan, and China that are tempering their monetary policy responses.
Revisiting Venus and Mars
Check out the accompanying pdf and chart collection. Executive Summary: “What planet are you from?,” analysts and investors may be wondering of each other these days, with the former super bullish and the latter super bearish. Analysts weren’t bullish enough about Q1 earnings. Yet investors are solely focused on the recession risk as the Fed fights inflation and have been pounding down valuations. … Barring a recession, the S&P 500 appears fairly valued, though we look today at a couple of still concerning valuation models. And of course, the odds of a recession aren’t trivial. … Also: The MegaCap-8 stocks are no longer “the Magnificent 8”; we examine their rise and fall. … And: Dr. Ed reviews “Jurassic World: Dominion” (- - -).
Damage Assessments: Stocks & Crypto
Check out the accompanying pdf and chart collection. Executive Summary: Ready for an unflinching look at the mauling the bear market has inflicted on specific S&P 500 sectors and industries? Jackie assesses the valuation and share-price carnage among the worst and best performers relative to both one year ago and January 3, when the S&P 500 peaked at its record high. … Also: Crypto lending markets have blown up for the second time in as many months. We look at the unregulated business that’s been called the “Wild West” of lending—the players, their troubles, and the SEC’s concerns. … Also: Car-sharing companies like the soon-to-be-public Turo aim to disrupt the car rental industry with an Airbnb-like business model.
It’s Fed Day!
Check out the accompanying pdf and chart collection. Executive Summary: Now that May’s CPI report has dashed hopes that inflation has peaked, it’s clear to investors that tethering inflation will take more aggressive tightening by the Fed. Today we will find out if the FOMC has decided to put more muscle into the fight. Will Powell show the same conviction to stay the course as his predecessor Volcker did decades ago? This may be Jerome Powell’s Volcker Moment. … Also: We look at what various Fed officials have said recently about the battle against inflation. … And: Tuesday’s inflation numbers mostly showed that inflation isn’t getting worse, but it isn’t getting better either.
Bull Market, R.I.P.
Check out the accompanying pdf and chart collection. Executive Summary: The S&P 500 breached bear market territory yesterday, and this week’s economic releases could drive the index deeper into bear terrain by highlighting the persistence of the inflation problem. … Bear markets nearly always are accompanied by recessions. But while we did recently raise our odds of recession to 45%, we’re still not in the recession camp; notably, analysts’ earnings expectations are still rising to record-high levels. Our higher recession odds combined with the unfolding bear market have lowered our sights for the S&P 500’s valuation multiple and price index for the rest of 2022 and for 2023.
That ’70s Show On Fast-Forward
Check out the accompanying pdf and chart collection. Executive Summary: May’s CPI report showed scant signs of inflation peaking, though we still expect peaking soon. The report also suggests a more hawkish Fed and higher recession risk. We’re raising our odds of a mild recession to 45% from 40%. … Investor and consumer sentiment both have soured. But this time, pervasive bearishness may not be as useful a contrarian bullish signal as in the past. There may not be much upside for stocks until the Fed is done tightening later this year. … Also: We revisit the question of the decade: Will the 2020s resemble the Great Inflation of the 1970s or the Roaring 1920s? … And: Dr. Ed reviews “Gaslit” (+ + +).
Energy & Consumers
Check out the accompanying pdf and chart collection. Executive Summary: President Biden says he wants to bring down gas and other energy prices. But his actions on the margin have been ineffectual so far. We doubt he’ll solve the problem without unshackling the US oil and gas industry’s production. Environmentalists wouldn’t be happy, but American citizens likely would. … And: We’re starting to notice industry analysts trimming earnings estimates for companies in the S&P 500 Consumer Discretionary sector. We examine which industries have seen estimates drop the most. … Also: A look at some innovative new products for these high-energy-cost times.
Whip Inflation Now!
Check out the accompanying pdf and chart collection. Executive Summary: There’s no disputing it anymore: America’s inflation problem isn’t transitory. It has been persistent. The question now is whether it is protracted or not. Biden’s response to “our top economic challenge” is lame. … On a brighter note, we expect the release of May’s CPI report on Friday to show that consumer durable goods inflation is rapidly moderating. On a dimmer note, that positive should be partially offset by the unabated climb of prices for gasoline, groceries, and rent. … Also: Europe’s economy has been remarkably resilient in the face of its formidable challenges. Melissa examines the headwinds and tailwinds for Europe’s economy and MSCI index.
Jamie’s Hurricane
Check out the accompanying pdf and chart collection. Executive Summary: Jamie Dimon spooked the financial markets last week with his forecast of an economic hurricane headed straight for us. Today, we take a balanced look at Dimon’s three big worries—the Fed’s quantitative tightening bursting financial asset bubbles, the Ukraine war driving commodity prices skyward, and consumers using up their stimulus savings. … Our perspective: Don’t be alarmed by the metaphor; hurricanes come and go. What matters is their magnitude, which Dimon admits is unknown. … However, the term “self-fulfilling prophecy” is bound to apply to some extent when the head of the nation’s largest bank says it’s going to batten down the credit hatches to prepare for a storm.
Altitude Sickness
Check out the accompanying pdf and chart collection. Executive Summary: As analysts’ earnings estimates have scaled new heights this year, investors have experienced valuation altitude sickness, which may soon be resolved by the drop in P/Es since the start of the year. Or it may resolve in a much more sickening fashion if a recession sends earnings expectations—and valuations—hurtling downward. …. A recession still isn’t our base case; we give it 40% odds. Notably, our forecasts for S&P 500 earnings and price targets assume that no recession is coming anytime soon. … To us, the latest economic indicators suggest a slowly growing economy headed for a soft landing, not a hard one. … Also: Wage inflation may be peaking.
Oil Trade & AI
Check out the accompanying pdf and chart collection. Executive Summary: Ever wonder why the US is still dependent on oil imports even though fracking has boosted the amount of oil produced domestically to about the same as that consumed? And with that being the case, why does the US bother exporting oil anyway? The answers involve both a mismatch between the kind of oil America produces and consumes as well as a 100-year-old shipping law that has outlived its usefulness. Eliminating the Jones Act could not only help the US oil industry but could also revive US shipping and improve supply chains. … Also: How Nvidia and others hope to capitalize on AI and high-performance computing.
Braking Energy & Breaking China
Check out the accompanying pdf and chart collection. Executive Summary: The Biden administration’s energy policy is worrying us. The plan it’s pursuing—a.k.a. “the transition”—is to pry Americans off fossil-fuel dependence by forcing up oil and gas prices. Such a crude plan is bound to have unintended consequences that put the overall economy at risk. Notably, the past six pre-pandemic recessions coincided with rapidly rising oil prices. This is one of the reasons that last week we raised our odds of a recession scenario to 40% from 30%. … And: More investors are agreeing with us that China is uninvestible. Amid economic woes, some self-inflicted, China is losing its foreign investors. We take a look at what’s scared them away.
Valuation Meltups & Meltdowns
Check out the accompanying pdf and chart collection. Executive Summary: Valuation is in the eye of the beholder, but the economic outlook that influences it isn’t as subjective or hard to forecast, with lots of data available to help. … We think forward P/Es may be range bound this year and next and the S&P 500 may remain volatile below its January 3 high before climbing to new highs in 2023 and 2024. … Recession fears are weighing on valuations. We raised the odds of a mild recession to 40%, up from 30%, last week and again explain why. … Also: We discuss the variables suggesting a moderation of inflation ahead, led by consumer durables. … Finally: Dr. Ed reviews “Benjamin Franklin” (+ + +).
Energy, Retailing & Hydrogen
Check out the accompanying pdf and chart collection. Executive Summary: Spending on stuff was so yesterday. Long-cooped-up consumers now want to spend on experiences and have fun! Not even stratospheric gasoline pump prices will keep them home this holiday weekend. Today, Jackie examines the factors driving energy prices skyward. … Also, some retailers’ Q1 earnings reports revealed a have/have-not dichotomy in the consumer discretionary space. Specifically, high-end Nordstrom made out far better last quarter than did retailers to the masses. … And: An update on the expanding use of hydrogen to fuel trucks, trains, and even factories.
The Recession Question: Raising the Odds to 40%
Check out the accompanying pdf and chart collection. Executive Summary: Might the only recession we have to fear be one triggered by recession fear itself? It’s possible that we could talk ourselves into one. So while we still expect the economy to grow through the end of next year, we are raising the odds we assign to a recession scenario from 30% to 40%. That lowers our stock-market sights for this year and next. … We have new estimates for S&P 500 revenues, earnings, profit margins, P/Es, and price targets, which we still see at a new high late next year. … Also, we explain what has caused recessions in the past and why we don’t see those dynamics developing now. We’re far from alone in our optimism: Analysts keep raising their earnings estimates, and insider buying has been on fire.
Bear Anatomy
Check out the accompanying pdf and chart collection. Executive Summary: History and data offer perspective into what a prospective bear market in the S&P 500 may mean for investors. Today, we examine the past two bear markets’ longevity, quantify the index’s valuation slide to date from its peak, compare component indexes’ performances, and see how much better global stock markets have been faring. … Also: Rapidly rising rent inflation will offset some of the improvement we expect in several other categories of consumer prices. Perversely, the Fed is putting upward pressure on rents by reducing the affordability of buying homes.
Bear Spray
Check out the accompanying pdf and chart collection. Executive Summary: Today, we zero in on stock market bears—why they’ve been wrong for 13 years (quantitative easing), why they’re right currently (quantitative tightening), and why we believe their outlook is too pessimistic. … Primarily, we don’t expect an imminent recession because conditions aren’t ripe for a credit crunch. Additionally, the recent tech stock weakness is no Tech Wreck 2.0; inflation, looking peakish already, won’t prove intractable; and wage pressures are stoking an economy-boosting productivity boom. … We stand behind our “Roaring 2020s” scenario following a brief interlude in the 1970s. … We’ll be taking bear spray to Yellowstone. … Finally, Dr Ed reviews “Downton Abbey.”
Retailers, Materials & Fintech
Check out the accompanying pdf and chart collection. Executive Summary: First the good news: Retail sales rose solidly in both March and April. Now the bad news: Two retail giants missed their Q1 earnings marks, causing recession-fearing investors to jettison their stocks. Jackie recaps what their management teams had to say about the quarter. … Also: With recession fears running high among investors, why is the S&P 500 Materials sector in their good graces? It has outperformed the market and most other sectors ytd. Within Materials, we focus on one industry with a shiny outlook, Steel, and a single member, Nucor. … Also: A look at Walmart’s foray into fintech.