Morning Briefings
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More on Inflation & Stocks
Check out the accompanying pdf and chart collection. Executive Summary: The S&P 500 is undergoing a correction more persistent than the 72 panic attacks we’ve counted during this bull market, but will it become a bear market? The jury is still out. There is precedent for a valuation-led bear market despite stellar corporate fundamentals, during 1987. There was no recession that time, and the bear market was short-lived. … Is the real earnings yield as bearish as it seems? … Also: We look at what stock markets do during inflationary periods. … And: The collective voice of small business suggests the economy is in a stagflationary funk. … Finally: A look at what’s happening on Japan’s monetary and fiscal policy fronts.
Inflation, Bonds & Stocks
Check out the accompanying pdf and chart collection. Executive Summary: Since 2008, the Fed’s quantitative easing had kept a lid on bond yields. But with the Fed now tightening—releasing bond yields to move solely by market forces—will yields be pushed above the inflation rate (where they usually reside)? A reversal from negative to positive real bond yields could trigger a credit crisis and recession; but we put the odds of that scenario at only 30%. Rather, we expect a soft landing for the economy, inflation moderating soon, and the Treasury bond yield marking time between 3.00%-3.25%. … For the stock market, high inflation boosts earnings yet depresses the valuations investors are willing to pay for those earnings. The lower valuations reflect investors’ fears that this will all end badly.
Inflation Peak-a-Boo
Check out the accompanying pdf and chart collection. Executive Summary: We concur with Fed Chair Powell that getting inflation back to Earth needn’t crash our strong, liquid economy. The Bond Vigilantes aren’t as far behind the inflation curve as the Fed: They’ve already tightened credit conditions in the financial markets significantly. We expect inflation to peak this summer between 6%-7% and to recede to 3%-4% next year with no recession. … We may have spotted the first signs of peaking inflation already, in lower three-month than y/y rises of several price and wage measures. … But there are certainly plenty of indicators that cast doubt on the peaking-soon scenario. … Also, a movie review: “Summit of the Gods” (+ + +).
Powell, Travel, Forward Earnings & Quantum Sensors
Check out the accompanying pdf and chart collection. Executive Summary: Investors liked the middle-of-the-road approach Fed Chair Powell laid out after yesterday’s FOMC meeting. We did too. … Travel-related industries are booming! Their Q1 earnings calls were brimming with optimism. Yet investors seem to have missed the memo: The share price indexes of most travel-related S&P 500 industries have plunged ytd ..: And it’s not just a travel thing: Most industries are seeing disconnects between earnings prospects and share price performance. Someone’s wrong: Either industry analysts are too optimistic in their estimates or investors too pessimistic about valuations. … Also: A developing technology with diverse potential uses: quantum sensors.
Fed Set To Hike By 200 Basis Points
Check out the accompanying pdf and chart collection. Executive Summary: The financial markets have thoroughly discounted the Fed’s plan to raise the federal funds rate incrementally by a total of 200bps, so why not dispense with the increments and go for it? That’s not in the Fed’s data-dependent DNA. … Today, we examine the case for investing in bonds: The Fed is bound to tame inflation one way or another. If inflation drops back to 3.0%-4.0% next year and 2.0% in 2024, as we expect, then a 3.00% 10-year Treasury bond yield is quite interesting. … Also: A look at the ECB’s policy playbook, which is much less hawkish than the Fed’s.
Too Much Pessimism?
Check out the accompanying pdf and chart collection. Executive Summary: To look at analysts’ record-high and rising estimates for the companies they follow, you’d never guess that investors are sweating bullets over prospects for the US economy. But are their fears of imminent recession justified? Today, we tackle that question, assessing both the negatives that investors are accentuating as well as the positives that some economic indicators are signaling. Importantly, the US economy is shipshape. … And we remind readers: Corrections, such as the S&P 500 is in now, tend to turn into bear markets only when investors’ recession fears materialize; when they fail to, valuation multiples tend to rebound.
The Big Leak
Check out the accompanying pdf and chart collection. Executive Summary: Spooked investors have driven valuation multiples down to the low end of our projected range and deposited the Nasdaq in a bear market and the S&P 500 back in correction territory. … Today we examine the causes and effects of global inflation. … Excessive US fiscal and monetary stimulus ignited the US inflation conflagration by triggering a demand shock that triggered a supply shock. When much of the stimulus leaked abroad (confirmed by trade data), it fueled global inflation. … Inflation has been deflating consumer spending on goods but not on services. But soon we expect durable goods inflation to peak and drop. Inflation has a history of being spikey. ... Finally, movie review: “WeCrashed” (+ + +) is about WeWork, not the stock market.
China, Tech & Electricity
Check out the accompanying pdf and chart collection. Executive Summary: With nearly a quarter of China’s people locked in their homes by strict Covid policies, China’s economy is suffering, its policymakers are reacting, and ripple effects are spreading throughout the globe. Today, we examine some of these effects on US companies with business ties to China and on financial markets. … Also: Investors have sent tech stocks to the doghouse, their collective performance down nearly 20% ytd, and the MegaCap-8 hasn’t been spared. Indeed, Netflix and Meta are down 67% and 46% ytd. … And a look at virtual power plants, making electricity demand as adjustable as solar/wind supply is intermittent.
Inflated Economy
Check out the accompanying pdf and chart collection. Executive Summary: Inflation is inflating corporate revenues: All 11 sectors of the S&P 500 boast rising forward revenues ytd, eight of them to record highs. It’s also inflating nominal economic growth even as real economic growth slows. This is bullish for earnings provided that companies can keep offloading higher costs to customers via pricing and provided that no recession comes along to stop that. … Also: We review the latest economic releases, which jibe with our stagflationary outlook for 2022. … And: The global food crisis. Food shortages and food inflation are bound to worsen, with dire implications for poorer nations around the world.
Waiting for a Break
Check out the accompanying pdf and chart collection. Executive Summary: Investors are fretting that the Fed will slam on the monetary brakes, sending the economy hurtling down a ravine, but how legit are their concerns? Historical behavior of stock valuations and earnings estimates prior to feared and actual recessions offers perspective. Corrections usually reflect false alarms about impending recessions, whereas sustained bear markets reflect the real thing. … We also check more conventional leading economic indicators for perspective. … Plus: Fresh supply-chain disruptions resulting from China’s widespread lockdowns could trigger a recession there and potentially weigh on growth here. … And: We examine the latest stats on another of China’s homegrown problems: its birth dearth.
The Forces of Inflation vs The Forces of Deflation
Check out the accompanying pdf and chart collection. Executive Summary: The stock market is correcting again, fear is rising again, and valuations are sagging under the weight of a hawkish Fed and rising bond yields. Yet consensus expected S&P 500 earnings continues breaking records. With 2022 shaping up as a volatile year for stocks, we anticipate a rally following the current selloff. … Also: Might “stayflation” frustrate the Fed’s 2.0% inflation goal? … We explain our view of inflation as a tug-of-war between four inflationary forces and four deflationary ones. … And: Treasury Secretary Yellen calls for a new world order featuring a “unified coalition of sanctioning countries,” the exclusion of pariah nations, and the “friend-sharing” of supply chains. Movie: “Inventing Anna” (+ + +).
LNG, Credit & Green Buildings
Check out the accompanying pdf and chart collection. Executive Summary: Natural gas prices are higher than they’ve been in over a decade owing not to demand but supply issues. The crux of the problem: Europe’s need to find non-Russian sources of gas. Jackie reports on the factors that have been turning the screws on the natural gas market and looks at where the S&P 500 Energy sector stands after its huge runup. … Also: A look at how the high-yield, asset-backed, and municipal areas of the bond market are faring with the Fed in tightening mode. ... And: Some innovative green buildings blur the lines between indoors and out.
Corporate Finance In Focus
Check out the accompanying pdf and chart collection. Executive Summary: Today, we roll up our sleeves, lift the hood, and take a close look at the mechanics of corporate finance. … We show how corporate America’s record levels of profits and cash flow are deployed. … We also show how a lack of understanding of corporate finance has given rise to some blatantly false notions of progressives—e.g., that share buybacks drive better stock-price performance and that money used repurchasing shares and paying dividends detracts from what’s available to spend on workers and capital investments.
How Will the Fed Stop The Wage-Price Spiral?
Check out the accompanying pdf and chart collection. Executive Summary: Can the Fed pull it off? Can it surgically subdue inflation without inflicting much collateral damage on the US economy? The now unanimously hawkish FOMC intends to try. Their current game plan seems to anticipate five increases of 50bps each, possibly at the next five FOMC meetings. … Meanwhile, we are on the lookout for signs of peaks in the latest inflation indicators; used car and truck prices are the first. … Rent and wages, on the other hand, are spinning upward along with prices in a mutually reinforcing spiral—calling into question the Fed’s optimism. … Also: A look at the causation loop between inflation and fiscal policy. ... Movie review: “Super Pumped: The Battle for Uber” (+ + +).
Inflation, Semis, Banks & Grocery Shopping
Check out the accompanying pdf and chart collection. Executive Summary: We’ve been on the lookout for signs of peak inflation, and we are deflated to report none to be seen in the latest PPI and small business survey releases. Instead, they telegraphed higher-for-longer inflation in a weakening stagflationary environment. … Semiconductor-related stocks have been beaten down ytd, but analysts expect double-digit earnings growth this year and next, aided by some fast-growing end markets. … Also: Expect smaller domestically focused banks to report stronger Q1 results than their big multinational counterparts. … And: Grocery shopping with no waiting in checkout lines or schlepping bags to the car? Yep: The supermarket industry is going high tech.
On the Lookout For Peak Inflation
Check out the accompanying pdf and chart collection. Executive Summary: War, supply-chain disruptions, soaring labor and commodity costs, monetary tightening causing possible recession—pshaw! All the disturbing global and US economic developments of late haven’t shaken industry analysts’ confidence that their companies are headed for record revenues, earnings, and profit margins over coming months, as passing inflated costs through to customers has been a cake walk. Our analysis of forward revenues and earnings reveals that and more. … Also: We slice and dice March CPI data, inflation expectations, and wage inflation—ever on the lookout for “peak inflation,” which may show up in June or July. … And: Is the housing market cooling off?
TINAC: There Is No Alternative Country
Check out the accompanying pdf and chart collection. Executive Summary: Why is the stock market defying the gravity of extremely grave situations? “TINA” may hold the answer: “There is no alternative” to stocks. … But now she’s been joined by “TINAC”—“there is no alternative country.” Global investors may be taking refuge in the US stock market as a safe haven in an unsafe world. … Today, we comparison-shop equity markets around the world and conclude that foreign stocks are cheaper but for several good reasons. … And: We look at why the US dollar is strong at a time of soaring commodity prices when usually the reverse is true.
Don’t Fight the Fed When the Fed Is Fighting Inflation
Check out the accompanying pdf and chart collection. Executive Summary: The war in Ukraine has heightened the odds of higher-for-longer inflation, tighter-for-longer monetary policy, and recession in the US and Europe, which we peg at 30% and 50%, respectively. … The global economy is stagflating, indicators suggest. … Will reining in inflation take just a nudge from the Fed or an all-out recession-triggering shove? We hunt for the answer in FOMC officials’ recent views and the latest inflation data. … Also: The Bond Vigilantes are back in the saddle again. … And: Stock investors are trying not to fight the Fed as it fights inflation—which should make for a volatile but upward climb to our 2022 and 2023 targets. ... Movie review: “Against the Ice” (+ + +).
Fed’s Hawks, China’s New Priority & Europe’s Gas Seekers
Check out the accompanying pdf and chart collection. Executive Summary: The newly released minutes of the FOMC’s March meeting suggest that even the Committee’s long-time doves now are hawks. So expect upcoming rate hikes of 50bps, not 25bps. The Fed aims to tamp down inflation without igniting a recession; investors are skeptical, but we expect inflation will moderate later this year, bringing the doves back. … Also: Can China achieve its heady economic growth goals amid a Covid resurgence, strict lockdown policies, and all the economic disruptions caused by both? We doubt it. … And: A look at the odds arrayed against EU countries trying to wean themselves off Russian oil and gas.
Another Earnings Season Seasoned with Inflation
Check out the accompanying pdf and chart collection. Executive Summary: Investors should have lots of questions for company managements during the upcoming earnings calls season. First-quarter macroeconomic and survey data paint a picture of modestly improving supply-chain problems but still high costs for manufacturers. For services providers, supply-chain and cost issues continue to strain their ability to meet demand. Profit margins should hold steady this year provided that price increases offset cost increases as we expect. … While earnings and revenue growth rates probably peaked during Q2-2021, analysts’ estimates suggest both remain solidly positive during Q1. … Also: Why the job market in Europe withstood the pandemic better than in the US.
Certainly Lots of Uncertainties
Check out the accompanying pdf and chart collection. Executive Summary: There’s lots of uncertainty about what’s going to happen next in a slew of areas pertinent to investing, including whether the US economy is heading for a recession, how high inflation will go and what the Fed will do about it, how the world order is changing, and how to value stocks amid all this flux. The many unknowns have made for a volatile stock market so far this year. Today, we run through nine uncertainties that have been keeping investors guessing, sharing our analysis of each to shed what light we can. ... Also: More on the “CFO Put”—the notion that corporations flush with cash are providing stock market support via buybacks, dividends, and M&A.
Inflating Earnings
Check out the accompanying pdf and chart collection. Executive Summary: Crosscurrents should continue to buffet the S&P 500’s forward P/E multiple in both directions, but the earnings portion of the equation should rise in the higher-for-longer inflationary environment we project. The S&P 500 is a good inflation hedge provided that the downward-blowing crosswinds continue to be offset by inflating earnings. … Today, we detail all the variables that go into our stock market assessment—including our stagflationary economic outlook; our estimates for corporate revenues, earnings, and profit margins; our target ranges for the S&P 500’s forward P/E and price levels this year and next; and the assumptions we’ve made to derive those targets. ... Movie review: “The Dropout” (+ + +).
Financials, Defense & Fusion
Check out the accompanying pdf and chart collection. Executive Summary: Today, Jackie takes a timely look at prospects for the S&P 500 Investment Banking & Brokerage industry. If the buoyant reception investors gave to Jefferies’ challenged but better-than-expected Q1 results is a bellwether, the industry may be poised to reverse its sector-lagging streak. … Also: A look at how the fiscal 2023 defense budget may take shape as it winds its way through Congress. … And: Fusion holds immense promise for producing carbon-free energy—if scientists can clear a big hurdle. They’re making progress.
It’s Still a Bull Market
Check out the accompanying pdf and chart collection. Executive Summary: March 8 may have marked the stock market’s bottom for this year; it now seems rapidly to be approaching a new record high as investors turn to stocks as an inflation hedge. The fog of war had masked the outlook, but the long-term bull market, punctuated by panic attacks, remains intact. We peg the S&P 500’s upside potential at 5000-6000 next year. … Also: We examine how the S&P 500 has performed historically during ups and downs of both the business cycle and the monetary policy cycle. … And: Melissa examines the economic toll Putin’s war is taking on Europe and how European policymakers are responding.
Three Related Delusions
Check out the accompanying pdf and chart collection. Executive Summary: The ripple effects of three delusions held in high places have triggered a host of interrelated global problems. Putin’s delusion about Ukraine’s sovereignty has led to war and related supply shortages of crucial commodities, which are exacerbating runaway inflation. … Powell’s delusion that the inflation outlook is more benign than it really is has misled bond investors. … But the bond market is finally shedding its delusions and acting more predictably. … How high might the 10-year Treasury bond yield go during this year of rising interest rates and stagflation? We project 3.00% by year-end.