Morning Briefings
Expert market analysis delivered every morning. Stay informed with comprehensive research and data-driven insights.
Twists & Turns of the Yield Curve
Check out the accompanying pdf and chart collection. Executive Summary: Two different yield-curve spreads are sending contradictory signals, and one of them is giving some investors the recession heebie-jeebies. But the other, more “official” yield-curve spread suggests no recession in sight, and ditto most other leading indicators. We see a stagflationary environment this year, with real GDP growing an average of 2.0% per quarter and inflation remaining persistent. … Also: A couple of short-maturity spreads relative to the federal funds rate likewise signal no recession. And we look to the Fed for insights on its chances of executing a soft landing and on the significance of various spreads.
Cybersecurity, Transports & Food
Check out the accompanying pdf and chart collection. Executive Summary: Corporate America’s cybersecurity budgets are bound to rise after the White House warned that Russian cyberattacks appear imminent and briefed the likely targets. So Jackie examines the implications for cybersecurity software providers. … Also: The transportation industries—rail, truckers, and airlines—are staring up a mountain of challenges. Yet the S&P 500 Transportation index has been outperforming the broad S&P 500 index so far this year. … And: The Ukraine war is highlighting vulnerabilities in global food distribution systems. Vertical indoor farming could be part of the solution—eventually.
War & Peace
Check out the accompanying pdf and chart collection. Executive Summary: Horrific as it is, Russia’s war in Ukraine hasn’t stopped the US stock market from advancing; investors know that geopolitical crises can present buying opportunities. The war has had significant impacts on commodity prices, inflation expectations, and certain stock market sectors. … The Energy and Materials sectors are benefiting from analysts’ higher revenues and earnings sights, and so are companies generally. Faster inflation is boosting revenues expectations to record highs, and the fact that earnings are following suit suggests most companies are able to pass their higher costs on to customers. ... Also: For auto makers and their suppliers, the war is escalating already extreme supply-chain challenges and upending the global playing field in multiple ways.
More Inflationary Developments
Check out the accompanying pdf and chart collection. Executive Summary: No matter how Putin’s War is resolved, the global world order will continue to face new challenges by the autocrats governing China, Iran, North Korea, and Russia. These Axis of Evil countries won’t stop trying to upend the post-WWII order established and implemented by the US. We look at the ramifications of that reality for globalization, inflation, and the investment outlook. … Also: New kinks in the supply chain mean that supply disruptions won’t be abating anytime soon, which will only increase inflationary pressures. … And: Powell’s speech yesterday confirmed his new, more hawkish stance. But an important yield-curve spread may be on the verge of inverting.
A Very Brief History of The Rise & Fall of Modern Monetary Theory
Check out the accompanying pdf and chart collection. Executive Summary: Now that the Fed is tightening, US monetary policy is no longer bullish for stocks; the “Fed Put” is dead. Replacing it: the “CFO Put,” i.e., the market-buoying activities of corporate CFOs. But the tug-of-war between bearish and bullish forces may not be won decisively by either side in coming months; we see a volatile sideways-trading S&P 500. … Yield-curve inversion fears are misplaced. Inversion doesn’t cause a financial crisis/credit crunch/recession scenario but predicts one. And more convincing predictors are flashing no-recession signals—including the Fed’s lack of inflation-fighting gusto. … Also: Policymakers implemented Modern Monetary Theory during the pandemic, revealing the folly of the theory.
Peace, Defense & the Metaverse
Check out the accompanying pdf and chart collection. Executive Summary: Hopes of a ceasefire in Ukraine have buoyed the stock market; but what comes after a ceasefire? Geopolitically, we expect a new world order to emerge. For the S&P 500, we see valuations pressured by higher-for-longer inflation and the Fed’s lame response. But for now, Panic Attack #74 is probably over… The Fed’s baby-step tightening move yesterday shows it’s in no hurry to corral inflation. … Also: Jackie examines the rising defense-spending plans domestically and abroad, the companies that would benefit, and the implications for the S&P 500 Aerospace & Defense index. … And: South Korea invades the metaverse.
Wage-Price-Rent Spiral
Check out the accompanying pdf and chart collection. Executive Summary: Company fundamentals have been scaling dazzling new heights since mid-2021, yet stock market valuations have toppled ignominiously from their 2021 peaks last spring. That disconnect reflects a tug of war between the opposing effects of high inflation and excess M2 liquidity on valuation multiples. … We have two big concerns about higher-for-longer inflation: Rent inflation is getting uglier, and the wage-price spiral is spiraling faster. In fact, we now see potential for a wage-price-rent spiral. … And: Melissa examines why rents have gone through the roof.
Wage-Price Spiral Spiraling
Check out the accompanying pdf and chart collection. Executive Summary: Today we examine Putin’s War from several angles: The ceasefire demands that Russia has put to Ukraine, the requests for assistance that Russia has put to China, and reasons for surging US gas prices. … We also examine runaway inflation from several angles: What the Fed could do about it, what it will likely do instead, and why the wage-price spiral won’t be stopping anytime soon.
Inflation, Liquidity & Valuation
Check out the accompanying pdf and chart collection. Executive Summary: The big question before stock investors now is: With inflation likely to remain troublesome, are valuations still too high or will ample M2 liquidity keep them elevated? We examine a handful of indicators that shed light on the relationship between inflation and valuation. … Will chronic labor shortages fuel a wage-price spiral over the rest of the decade, as predicted by Charles Goodhart? Our money remains on businesses deploying productivity-enhancing technology to get around their labor-supply challenges. … And: Putin’s War should mean more gradual interest-rate increases ahead, for now. …Also: Dr. Ed reviews “Vikings: Valhalla” (+ + +).
Stagflation, Russian Oil & Gas, And Carbon Credits
Check out the accompanying pdf and chart collection. Executive Summary: Stagflation—higher inflation with slower economic growth—may be upon us, suggests the NFIB’s February survey of small business owners. Most are struggling to fill open positions, which is perpetuating a wage-price spiral. Earlier this week, we raised our inflation outlook and dropped our GDP forecast—resulting in lower expectations for the stock market this year. … And: How will the US and Europe meet their energy needs with less reliance on Russian oil and gas imports? Jackie looks at this question from multiple angles. … Also: How is the EU carbon credit market weathering its first war? Spoiler alert: Not well.
Commodities Go Limit Up
Check out the accompanying pdf and chart collection. Executive Summary: Is China’s President Xi able to stop Putin’s War? With high stakes for both China’s economy and its reputation on the world stage, he has every reason to try. The Dragon must restrain the Bear. … The CRB raw industrials spot price index typically peaks and troughs in lockstep with business cycles. This time is different: The CRB’s vertical ascent reflects not booming global demand as usual but looming supply crunches. … And: Blocking Russian exports from global markets will mean painful supply constraints for the rest of the world, not only of oil and gas but also of metals and agricultural products.
Past & Future Earnings
Check out the accompanying pdf and chart collection. Executive Summary: Today, we examine the fundamental data that drive the stock market, as just reported for Q4 and as projected by industry analysts and by us for this year and next. S&P 500 companies’ Q4 results show record highs for revenues and earnings, but the profit margin continued to edge down from the Q2 peak. … Our stagflation economic forecast prompts us to raise our S&P 500 revenue, but not earnings, estimates. We expect relatively flat S&P 500 profit margins around 13% this year and next. … Also, we look at what declining forward P/Es have meant for the four major investment styles.
It’s a Mad, Mad, Mad, Mad World
Check out the accompanying pdf and chart collection. Executive Summary: With the whole world at the mercy of Mad Vlad, the pandemic now seems like a walk in the park. A nuclear power plant catastrophe has been narrowly averted, but Putin’s war has melted down Russia’s stock market and currency. … For the US economy, we now see stagflation, with persistently higher inflation and less economic growth than expected before the war. A recession can no longer be ruled out. … For stock investors, we think 2022 will continue to be one of this bull market’s toughest years. We’ve dropped our year-end 2022 and 2023 S&P 500 targets to 4000, a 16% decline, and 5000, a 25% rebound to a new record high.
Sentiment, Retailers, China & Crypto
Check out the accompanying chart collection. Executive Summary: Bargain buying now for the long term may make sense, suggests the Bull-Bear Ratio and lessons from past geopolitical shocks. A caveat: This time may be different given coming interest-rate increases and the potential for disrupted energy markets. … Retailers’ recent earnings reports have been decidedly optimistic, but stock investors aren’t convinced. Why are they spooked when the C-suite folks are sanguine? … China’s President Xi may have a change of heart about former BFF Putin; we explain why we think so. … And: Cryptocurrencies’ new wartime uses.
The Case for a Ceasefire
Check out the accompanying pdf and chart collection. Executive Summary: The Cold War is back on. What’s next in the hot war between Russia and Ukraine? Major considerations include whether Russia gains the upper hand militarily, the fact that it is losing much economically, and whether negotiations will provide an exit for both sides. … Longer term, Russia’s future is bleak if demography is indeed destiny. … And: What’s with all the slicing and dicing of apples and oranges that Fed banks do to understand inflation? We’d toss out most of the concoctions.
Inflation in the Second Cold War
Check out the accompanying pdf and chart collection. Executive Summary: The end of the Cold War in the late 1980s was very disinflationary—perpetuating freer trade, greater global prosperity, and lower inflation. Will February 24, 2022 mark the start of Cold War 2.0 and with it the Great Inflation 2.0? To answer that, we look at the history of inflation from a geopolitical perspective before we examine four powerful constraints on inflation, the “4Ds”—some of which have been weakening. … Also: a look at what’s been keeping frackers from fracking more oil.
‘Stop the World—I Want To Get Off!’
Check out the accompanying pdf and chart collection. Executive Summary: “Buy to the sound of cannons, sell to the sound of trumpets.” That advice worked on Thursday as Russia invaded Ukraine. What about that shocking day reassured investors enough to drive the stock market up? We take a look. … Also working that day was the Bull-Bear Ratio’s contrarian buy signal. … Economically, the war may bring heightened global inflation, more supply-chain disruptions, and possibly higher energy prices. For the US economy, stagflation could result, but we still don’t expect a recession. … And: Is madman Putin’s plan already doomed? ... Finally, Dr. Ed reviews “CODA” (+).
Sentiment, Industrials, and Crispr
Check out the accompanying pdf and chart collection. Executive Summary: Stock market bearishness is increasing, which is bullish from a contrarian perspective. The Bull/Bear Ratio has dropped close to levels that have heralded great buying opportunities in the past. That doesn’t preclude further stock market declines, but it does suggest that bargain buying for the long term makes sense. … A confluence of trends points to boom times for manufacturing industries and the businesses that support them. Some of these trends are industry specific, some apply to manufacturing broadly. … Also: a look at exciting new medical applications for disruptive technology Crispr.
Inflating Fundamentals vs Deflating Valuations
Check out the accompanying pdf and chart collection. Executive Summary: The Ukraine crisis has triggered the stock market’s 74th panic attack of this bull market, by our count. Coming on the heels of the 73rd panic attack, the two together qualify as a correction. Could it become a bear market? Perhaps if much higher oil and gas prices result from the crisis, but that’s hard to conclude. What we do expect over the near term is more of the same sideways trading with volatile swings. Notably, however, geopolitical crises have often been buying opportunities for stock investors. … And while valuations have been deflating lately, fundamentals—revenues, earnings, and profit margins—have been inflating dramatically. … Also: What members of the “Federal Open Mouth Committee” have been saying about the course of monetary policy.
Pieces of the Economic Puzzle
Check out the accompanying pdf and chart collection. Executive Summary: Are consumers more depressed about inflation or more optimistic about employment? Our Consumer Optimism Index, which captures both trends, stands well below pre-pandemic levels, suggesting the former. In fact, January’s strong retail sales may reflect inflation-driven behavior, i.e., the inclination to buy in advance of price rises. … We also examine what’s happening behind the data for industrial production, inventories, transportation, construction, capital spending, and trade. … And: What’s the Fed’s take on the inflation problem? Officials have abandoned the term “transitory” but apparently not the hope. We have only one word for that: “delusional.”
Insurance, Tech & EVs
Check out the accompanying pdf and chart collection. Executive Summary: Visions of higher interest rates to come are stoking investors’ optimism about prospects for financial services companies, fueling the S&P 500 Financials sector’s impressive ytd outperformance. Within the sector, the insurance industry has been faring well by both earnings and share-price measures as pricing power and strong investment returns have helped to offset higher costs and losses. … Also: Washington has guns out for Big Tech; we recap recent regulatory and (bipartisan!) legislative initiatives afoot. … And we survey the playing field for electric vehicles after their starring roles in Super Bowl ads.
Will Inflation Persist Along With Labor Shortages?
Check out the accompanying pdf and chart collection. Executive Summary: Putin must be day-trading oil futures. … Why the inflation story is one of countervailing forces: Consumers’ inflation expectations have been edging down even as price pressures continue to ramp up. Supply-chain disruptions should continue to ease as the pandemic abates, but labor shortages will persist for the foreseeable future. Wages and prices have been spiraling upward together recently, and productivity growth can’t improve fast enough to slow the wage-price spiral for now. … Also: As the world braces for a wave of monetary tightening after years of ease in the extreme, we examine which of the major central banks likely will make their moves when, and why.
Yes! We Have No Bananas
Check out the accompanying pdf and chart collection. Executive Summary: With the Fed far behind the inflation curve and the yield curve spread rapidly narrowing, are fears of an imminent recession (a.k.a. “banana”) justified? For now, we’re singing the 1923 hit song with the ambivalent message “Yes! We Have No Bananas.” That’s because most indicators don’t point toward the prospect of a recession but a couple do: the fastest business cycle in history and inflation rates that could lead to a Volcker 2.0 scenario. We also consider what’s up with this yield curve. And we explain why we’re maintaining our long-standing recommendation to overweight US stocks in global portfolios.
Putin & Inflation Remain Persistent
Check out the accompanying pdf and chart collection. Happy Saint Valentine’s Day! (1) Putin says collapse of USSR was geopolitical disaster. (2) He wants to put Humpty Dumpty back together again. (3) War is imminent, maybe. (4) A message to other former Soviet states. (5) Higher oil prices, higher S&P 500 Energy stock prices. (6) Tweaking odds from 65/35 to 60/40 on Roaring 2020s vs Great Inflation 2.0 alternate scenarios. (7) No sign of peak in CPI, though base effect may still be having an effect. (8) More upward pressure on energy, metals, and food prices. (9) 1970s déjà vu all over again in some respects. (10) Fed has never been further behind the inflation curve, while hoping it will bend. (11) Paying the price for the Fed’s original sin. (12) Movie review: “Nightmare Alley” (+).
What’s in Style?
Check out the accompanying pdf and chart collection. (1) Work in progress. (2) Overweight stocks and cash, but underweight bonds. (3) Key assumption: Inflation peaks soon. (4) Risk is it doesn’t. (5) Record negative real interest rates. (6) OMG moment ahead? (7) Cash for buying cheaper stocks and bonds. (8) The “CFO Put,” again. (9) Fundamentals still looking great. (10) Three favorite S&P 500 sectors. (11) The MegaCap-8 still have a huge influence. (12) Hard to overweight them. (13) SMidCaps are still cheap. (14) Why we are not fans of Growth vs Value. (15) Gentler robots.