“They” attempted to rally stocks on Friday morning. “They” really tried. About half an hour after the opening bell, stocks including Apple (AAPL) were trading “in the green.” That was it. For the day. The brawl was constant for the final six hours of the regular session, only accelerating as the weekend drew near. Two days. Was it enough to cool the beast?
Last week, Amazon (AMZN) posted its first quarterly loss in seven years and the company’s slowest revenue growth on record. Last week Apple brought what appeared to be a good quarter, but also a minor warning from the biggest consumer electronics company of all time. A warning that Covid-related shutdowns in China would likely stifle revenue generation by as much as $8 billion in the current quarter. oh joy
there is more Much more. As China continues with its zero-Covid policy, which has certainly slowed economic activity, the war in Eastern Europe seems to be lasting longer than many had hoped, as the war has spread to both Russian and perhaps Moldovan soil.
However, the primary catalysts may have been domestic. FOMC meets this week and will decide monetary policy by Wednesday, like last week… New home sales disappointed in March, labor costs in March rose well above already high expectations, consumer confidence slumped in April and personal income in March absolute beat up March Personal Expenses – absolutely beat up for a second month in three. This pointed to a continuation of the four-quarter streak of contracting discretionary earnings reported by the BEA in last week’s first estimate of US first-quarter GDP “growth”.
Many economists tried to downplay last week’s report, which showed US Q1 GDP at -1.4% (Q/Q, SAAR) while Wall Street economists consensus came in at +1.1% and the Atlanta Fed’s GDPNow model came in at +0.4%. . Can we really trust the response of any group that was so wrong prior to this report? Understand that they do. They as a group… failed badly in their main job function. That implies that at least a few Wall Street economists could copy each other’s homework. A lack of inventory building is to blame, they said, oblivious to the fact that inventory building has almost exclusively supported economic growth in the second half of 2021.
It’s true that public spending fell at almost every level in the first quarter, and that may have reversed this quarter. That being said, I have no doubt that the necessary disappearance of helicopter funds is taking its toll and that certain individuals are spending money they don’t earn just to try to maintain household living standards. This is happening just when the cost of running a household or running a business on credit is about to skyrocket… just as the “slosh” of excess liquidity is gradually becoming less sloshing month by month.
The beast will be in touch on Wednesday. Then, two days later… April Jobs Day. Job creation and wage growth with no hope of even remotely matching annual consumer-level inflation. Great. Inventory building… 4eva.
I know you already know some of this. But let’s go through it. Soak it in so you/us really appreciate how ‘risk off’ sentiment has been as valuations fall to try and find the right level when monetary conditions tighten. The Nasdaq Composite fell 3.93% last week and is now -21.16% year-to-date and 26.01% below the November high for the index. The Nasdaq Composite spat 13.3% higher in April alone, making the week-ending month the index’s worst month since October 2008. The S&P 500 is down 3.27% over the past five days, bringing the index down 13.31% for 2022. The S&P 500 is now -14.25% off its January high.
Perhaps the most uncomfortable part of Friday’s beating was the fact that both major large-cap stock indices closed near session lows, undercutting lows set earlier in the week. Incidentally, the Nasdaq Composite has undercut the lows of both last February and March, as well as the March 2021 low. In fact, Friday threw the Nasdaq Composite back into December 2020. That’s right. The entire Nasdaq wonder of 2021 has been reevaluated.
Readers will note that Friday’s overall CBOE options put/call ratio ended the day at levels not seen since March 2020.
This came as all 11 of S&P’s sector-specific SPDR ETFs closed lower last week. Ten of the 11 sector SPDRs ended down 1% or more, with only Materials (XLB) outperforming at -0.86%. Eight of the 11 sectors are down 2% or more last week, while six of 11 are down more than 3% and four of 11 more than 4%. The meltdown was led by consumer discretionary (XLY) and REITs (XLRE) over the past five days, down 7.36% and 5.61%, respectively.
China’s Covid policies will continue to slow its manufacturing base as well as its ability to operate that country’s seaports. The war in Europe, including European and global measures taken to slow Russian aggression, will continue to impede world supplies of energy and agricultural commodities. Nothing we can do monetarily to change these conditions, except for the US multinationals who realize they need to shorten their supply chains. (As if the last two years hadn’t already taught that lesson.)
Regardless, all the subtle and far less than subtle messages have been sent to the US financial market to pave the way for aggressive increases in short-term to short-term interest rates coupled with an almost equally aggressive reduction in central bank balance sheets. Where do share prices actually belong in such an environment?
According to FactSet, 55% of the S&P 500 have already reported first-quarter performance. 80% of these companies beat earnings expectations, while 72% beat sales. The (composite) earnings growth rate for the quarter is currently 7.1%, up from 6.6% a week ago, but still the slowest pace of growth since 2020. Revenue growth for the quarter is currently 12.2%, up from 11.1 %. last week. Those numbers aren’t terrible at all. It’s more about what companies are saying in their earnings calls regarding supply chain constraints, inflation, and then the rising cost of doing business. Current quarter (Q2) earnings growth expectations have now fallen to +5.5% from just 7% a week ago.
However, the S&P 500 ended last week at 18.1 times forward 12-month earnings, down from the five-month moving average of 18.6 times. It must be understood that the entire five-year window was for the most part a window comprised of nothing but fiscal and monetary conditions that were at the very least “accommodative” and perhaps quite perverse in the resulting bullishness seen in risk asset price discovery. The 10-year average forward-looking PE (still using FactSet here) for the S&P 500 is 16.9x. Is this the direction for US stocks? Is that low enough? Is that too high? Pricing conditions have been distorted for so long that no one knows how to properly price the purity of the free market. All salvation purity. As if we’d ever know.
Each new low in indices is both a new setback and a potential for opportunity. There will be a trend reversal. The trend is currently lower. There will be rallies. Some of them will be aggressive. That’s all fine, good, and quite tradable. The fact is that every rally must be followed by a confirmation for a trend reversal to occur. Picking bottoms is gambling without confirmation. Both the S&P 500 and Nasdaq Composite are approaching technical oversold. (Honestly, they’re not really there yet.) Nothing’s cheap just because it’s cheaper than it used to be. What was cheap or expensive in one environment has nothing to do with what is cheap or expensive in another.
I would think there could be a sharp rally sometime this week. There will be a lot of news. A lot of market moving keywords get thrown around. Adapt. The algorithms will hunt you down. Hunt them instead. They cannot hit you regularly when you become the wind. don’t be a wall You line up here and there… oh, you could get the point across. They could also be nailed. This environment (except for professional short sellers, but that’s a very difficult skill to master) favors trading over investing. Until we see a trend reversal followed by volume-based confirmation. No fear. No feelings. Your enemy is not afraid. No feelings. Learn to fight this war. The last war is over.
Business (All Times Eastern)
09:45 – Markit Manufacturing PMI (Apr-rev): flashed 59.7.
10:00 – ISM Manufacturing Index (April): Expected 57.7, last 57.1.
10:00 – Construction Expenses (March): Expected 0.8% m/m, Last 0.5% m/m.
the fed (All Times Eastern)
Fed blackout period.
Today’s result highlights (consensus EPS expectations)
Before the Open: (MCO) (2.89)
After Close: (CAR) (3.54), (DVN) (1.76), (NXPI) (3.19)
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