Monday morning. Yields have risen at the longer end of the US Treasury curve since Sunday (and Friday) night. That would broadly cover everything from the US 7-year bond to 30-year bonds. Stock index futures traded lower. Monetary conditions appear to be tightening further, as they had last Thursday and Friday, forcing what felt like a “free fall” in domestic stock markets last Thursday.
Panic in 2022 feels different than other market shocks I’ve experienced over my long career. Of course, the fact that markets in 2022 involve very little human interaction at the point of sale or points of sale has created this trait, making interpreting what a capitulation will look like, or when a capitulation will occur, more difficult to define than likely ever before .
No, I don’t think we’ve seen a broad capital market capitulation yet. There may have been a capitulation for some, but by and large I think most market participants are probably still in either “desperate mode”, “panic mode” or somewhere in between. Panic turns to capitulation, but not until almost everyone is on board, and while valuations are certainly very high, would anyone out there call the stock market ‘dirty’ cheap? I would think, although I could be wrong, that at the point where there has been a capitulation and said capitulation has run its course, stocks would be amazingly cheap, at least in the short term.
TWWTW
The wild week that was. The week started harmlessly. Monday. Tuesday. Stock prices have worked their way up slightly after April 2020, the month of pain. Ahead of Wednesday’s FOMC policy statement. That statement came and went on Wednesday afternoon. Markets (and citizens) got what they bargained for. The Fed had raised its target for the fed funds rate by 50 basis points and indicated there was a lot more where that was coming from. The Fed also announced that its quantitative tightening program would begin on June 1st. That was all priced in.
The surprise came during the press conference when Fed Chair Jerome Powell appeared to rule out any hikes of 75 basis points at upcoming meetings. That was all the markets needed to hear. Yields fell. US stock markets rocketed for the last 90 minutes of Wednesday’s regular session.
By Thursday markets as a whole had reconsidered their initial reaction and appeared to have decided that the chairman’s words were too dovish. Yields rose sharply as the bond market decided to tighten monetary conditions on its own, and stocks gave back even more on Thursday than they had gained on Wednesday. Markets were not held.
Friday brought us the results of the Bureau of Labor Statistics’ dual employment-based surveys for the month of April. The results of these polls have been mixed at best. While the business survey showed robust job creation, the household survey showed an outright decline in job growth. Additionally, while certainly not weak, wage growth, the unemployment rate, labor force participation and average workweek disappointed relative to expectations. Again, the markets sold off heavily, but then rallied strongly by Friday’s closing bell, turning a deep red session into “just” a red session. Trading volumes picked up towards the end of the week.
marketplace
The week felt terrible in my opinion. However, results were really anywhere from “down low” for some large-cap stock indices to down significantly for others. While the Dow Industrials was down 0.24% for the week and the S&P 500 was down 0.21%, the Dow Transports actually ended the five-day period up 0.24%. The Nasdaq siblings took a hit as the composite fell 1.54% but the 100 fell 1.25%. Excluding large caps, the S&P Midcap 400 is down 0.77% while the Russell 2000 is down 1.32%. Year to date, the Nasdaq Composite has returned 22.37% and is now 25.1% off its November high. The S&P 500 is down 13.49% this year and closed 14.4% below its January high on Friday.
Sector performance could not be more mixed than markets have been over the past week. Five of S&P’s 11 sector-specific SPDR ETFs were shaded green for the week, with Energy (XLE) leading the way at +10.34%. Utilities (XLU) came in second at +1.33%. At the other end of the spectrum, REITs (XLRE) ended the week down -3.8%, with Consumer Discretionary (XLY) and Consumer Staples (XLP) down 2.9% and 1.18%, respectively.
winning season
For the most part, first-quarter earnings have been pretty good. FactSet reports that after 87% of the S&P 500 already reported, the compounded (reported and forecast) earnings growth rate is now up 9.1% from the first quarter of 2021 on a (compounded) revenue growth of 13.3%. Those metrics are up from 7.1% and 12.2% just a week ago. Forecasts for the second quarter of 2022 are now “down” to 4.8% earnings growth on 9.8% revenue growth. A week ago, the outlook for the second quarter was 5.5% growth at 9.7% growth. Still with FactSet, the consensus view for full-year 2022 is 10.1% earnings growth on 10.0% revenue growth.
The S&P 500 closed last week at 17.6 times forward looking earnings. This is now well below the five-year average of 18.6 times and not too far above the 10-year average of 16.9 times. Four sectors are still trading above their five-year moving averages: Consumer Staples at 21.5x (vs 19.5x), Real Estate at 20.3x (vs 19.6x), Utilities at 20.3x times (versus 18.4 times) and energy at 10.3 times (versus 6.4 times). ). With the majority of retailers yet to report their quarters, earnings will slow this week, especially towards the end of this week.
Next week
Russia remains and is becoming more and more unpredictable as its conventional forces in Ukraine appear to have been humiliated. Covid in China remains as much an economic problem as it is a public health problem. However, in the Northeast US and elsewhere, Covid appears to be becoming a slowdown in economic activity again.
Everything that has been said for the coming week probably focuses on two points from a market perspective. The result highlight comes on Wednesday evening, as reported by The Walt Disney Company (DIS). The event is watched not only for the company’s financial performance, but also in case anything is said about the company’s ongoing political struggles at the press conference.
Ahead of this earnings release, the BLS is due to release April CPI (Consumer Price Index) data on Wednesday morning. The pace of headline consumer inflation is expected to have slowed slightly to 8.1% y/y in April from a March peak of 8.5% y/y. Core inflation is expected to have risen by 6.0% in April from 6.5% in March.
throughts
The US economy may or may not be in recession. We know activity dropped a bit sharply in the first quarter. Currently (it’s absurdly early), the Atlanta Fed’s GDPNow model shows growth of 2.2% for Q2. The US could very well escape recession this year and postpone it until early next year. Other global economies may not be so lucky.
As the Fed looks to raise short-term interest rates and withdraws its artificial support for the Treasury yield curve, the curve should continue to steepen. While this is actually healthy, it also makes it more painful and difficult for businesses and households to increase liquidity. So less sloshing.
I think it’s likely, or at least possible, that our friends at the FOMC will find out that the neutral rate could be significantly lower than many of them suspect. You may also find that even successfully containing consumer inflation and stimulating the economy does not go hand in hand, as correcting political excess does not correct scarcity caused by war or plague. I suspect even if you miss a supposed bottom, it won’t be like missing the last train to somewhere. This person may receive more than one opportunity.
That means adapting. Take what is given. For now, if it’s safer to stretch broadly and trade more than invest, as I’ve been saying for months, then this is the environment. Fulfill your inner role.
company
– The embargo period for Rivian Automotive (RIVN) insiders ended on Sunday. CNBC reported over the weekend that Ford Motor (F) has moved to sell 8 million shares of its stake (102 million) through Goldman Sachs (GS). From the same story, JP Morgan (JPM) is said to be looking to move a block from 13 million to 15 million shares for an unknown seller. Both blocks are said to cost (in the article) $26.90. RIVN closed at $28.79 on Friday.
– Independent retailer Kohl’s (KSS) is set to hold the company’s annual meeting this Wednesday (May 11), where activist investors are pushing for a seat on the board. In my opinion, the shares will likely react to the shareholder vote at the meeting. The stock was trading at $55.73 on Friday. Recently there have been rumors of offers for the company approaching $68 with nothing coming of them. At least that will be interesting.
Note to readers: I can only write to you sporadically this week, especially earlier this week as a close family member for whom I am the legal representative is having major surgery this morning to treat a life threatening illness. That has to be my priority and focus at this moment. I will continue to write to you as occasional gifts. Thank you in advance for your patience and prayers.
Business (All Times Eastern)
10:00 – Wholesale Inventories (March): Expected 2.3% m/m, last 2.6% m/m.
The Fed (All Times Eastern)
08:45 – Narrator: Atlanta Fed Pres. Raphael Bostik.
Today’s result highlights (consensus EPS expectations)
Before the Open: (BNTX) (9.16), (PLTR) (.04), (TSN) (1.86)
After market close: (AMC) (-.68), (NVAX) (2.49), (SPG) (2.74), (UPST) (.53)
(DIS and F are Action Alerts PLUS membership club holdings. Would you like to be notified before A` buys or sells these stocks? Learn more now.)
Receive an email alert every time I write an article for Real Money. Click +Follow next to my author of this article.
Comments are closed.