This bi-weekly financial section is published in USA Today's: The Town Journal. This publication is distributed in Bergen County New Jersey, covering 4 towns with roughly 22,000 residents.
CONFLICT DOMINATES MARKETS. ARE YOU PREPARED?
US Markets
The optimism that was built on the epic price rebound in March has turned into fear. The unpleasant reality is this, the market backdrop has not improved. There is no change to market internals including asset flows, participants’ sentiment, or measures of market participation called market breadth. There is no change with the war; it continues to rage, inflicting horror, pain, and suffering. There is no change in the inflation data as The Federal Reserve continues to plod its way through the minefield of inflation while balancing its dual mandate of price stability and employment. To this already nauseating market volatility, we expect to add more. Next week, 04/25 – 05/01, we enter the heart of earnings season. This is when many, including the largest, companies reveal their operating results from the prior quarter and share their future expectations.
It is true that the stock market is actually a market of stocks. Today, it is a market of stocks in bear markets. This is to say, the price-per-share of many companies has dropped far below where they were just several weeks or months ago. According to the research team at All Star Charts, the number of stocks printing 52-week price lows outnumbers the amount of stocks printing 52-week price highs. This is true on the New York Stock Exchange and on the Nasdaq Composite Exchange. This has been the case for 21 weeks in a row now. This is not behavior that typifies cyclical bull-markets. Yes, there have been several corners of the market to take refuge in amongst this selling, though most of those were hit last week.
The S&P 500 closed down with a loss of 2.68%. The tech-driven Nasdaq 100 finished with a loss of 3.85%. The “blue chip” Dow Jones Industrial Average finished with a loss of 1.86%. The speculative, small-cap Russell 2000 finished with a loss of 3.16%. 2 of 11 S&P 500 sectors closed higher. Those were real-estate and consumer staples. The laggards were energy and communication services.
Market Moving Headlines
After the market closed on Tuesday, 04/19, Netflix announced its earnings. The company was looking strong at last month’s Academy Awards ceremony as it boasted 27 Oscar nominations and a win in the best director category. The pomp and circumstance was not enough to keep institutional investors interested. Netflix reported a loss of 200,000 net subscribers during the first quarter this year. The loss was the first such loss in more than a decade, and the company warned that it could shed the same number of subscribers this current quarter. There were also some positives to point out. Earnings per share for the quarter topped Wall Street’s estimates. More importantly, the company showed that it is a cash-generating machine. It generated $802 million in free cash flow during the first quarter. Last week, the stock finished down 36.82%. Since its price peaked in October 2021, Netflix’s share price is down 70%. It has crumbled from $700 per share to $215 per share as of Friday 04/22.
Also on Tuesday, 04/19, the US Census Bureau released its housing report for March. Housing starts rose to beat economists’ expectations. Starts for buildings of five units or more increased to the highest level since January 2020, while single-family housing starts slipped. Building permits also advanced more than expected in March, up after falling in February. As with housing starts, the gains came from a boost in permits for multi-family dwellings with a downtick in single family. Of note, the report showed housing completions were below estimates as builders continue to struggle with supply chain disruptions and labor issues. Housing units authorized but not yet started rose to the highest level since the 1970s.
On Wednesday, 04/20, Tesla, the 4th largest company in the S&P 500, reported its earnings after the closing bell. The company reported its total profit was more than $5.26 billion. Quarterly sales soared, and earnings per share of $3.22 beat analysts’ estimates. Another key metric, number of vehicles sold, was a record for Tesla at 310,048. The report did cite the headwinds of surging costs for raw materials and temporary Covid related shutdowns in China. These headwinds have caused its factories to run below operating capacity and to maintain very low inventories. This in turn has caused an increase in production and delivery times for its customers. Elon Musk also said, the company is continuing to invest heavily in its self-driving software and technology to make robotaxis a reality. These fully autonomous vehicles will not have steering wheels or pedals. Tesla closed the week with a gain of 2.04% as the S&P 500 itself closed with a loss of 2.68%. Tesla was the only one of the ten largest companies in the S&P 500 to finish last week with a gain.
Also on Wednesday, the Federal Reserve released its Beige Book. This is simply a periodic survey of business conditions around the country, according to the Fed itself. I pulled the following highlights from the Beige Book directly:
On Overall Economic Activity
Economic activity expanded at a moderate pace since mid-February.
Consumer spending accelerated among retail and non-financial service firms.
Manufacturing activity was *solid overall across most Districts, but supply chain backlogs, labor market tightness, and elevated input costs continued to pose challenges on firms' abilities to meet demand. Vehicle sales remained largely constrained by low inventories.
Commercial real estate activity accelerated modestly as office occupancy and retail activity increased. Districts' contacts reported continued strong demand for residential real estate but limited supply.
*By solid, they fail to explain, they mean their indicator was in positive territory though continues to show a slowdown in pace.
On Prices
Contacts across Districts, particularly those in manufacturing, noted steep increases in raw materials, transportation, and labor costs.
Strong demand generally allowed firms to pass through input cost increases to customers, for example, via fuel surcharges for freight and airline fares.
Firms in most Districts expected inflationary pressures to continue over the coming months.
On Thursday, 04/22, Federal Reserve Chair Jerome Powell spoke as part of a panel of top economic policy officials at an International Monetary Fund event. Chair Powell said the central bank needs to “move more quickly” to raise interest rates in order to fight soaring inflation. This is because, compared with the central bank’s 2004-2006 tightening cycle, inflation now is higher and yet monetary policy is more accommodative. He said a hike of 50 basis points (0.50%) will be considered at the Fed’s next meeting on May 3rd and 4th.Powell explained the Fed’s goal is to place demand and supply back in balance to reduce inflation without creating an economic slowdown that will send the U.S. economy into a recession.
On Thursday we also we received The Conference Board Leading Economic Index® (LEI). This index is an aggregate measure of roughly 10 leading economic indicators. It increased by 30 basis points (0.30%) in March following a 60 basis point increase (0.60%) increase in February. The Conference Board projects growth of 3.0% for Real Gross Domestic Product (GDP) in 2022 and 2.2% real growth for 2023. This is less than 5.6% growth from 2021, but still well above the pre-Covid trend. The report noted that downside risks to the growth outlook remain, associated with an intensification of supply chain disruptions and inflation linked to lingering pandemic shutdowns, the war, tightening of monetary policy, and persistent labor shortages. The recent behavior of the leading indicators points to continued, moderate, economic growth in the near term.
Additionally on Thursday, the Philadelphia Manufacturing Business Outlook Survey data was released. The indicators for current activity, new orders, and shipments all decreased but remained positive. The firms continued to indicate overall increases in employment and widespread increases in prices. The indicators for future general activity and new orders fell notably, but the respondents continue to expect growth overall through the next six months. This survey release is fuel for people who are concerned about the economy and the implications about what aggressive tightening by the Federal reserve might do to the economy. The future new order and future activity indexes were both down, however, we do not have enough data yet to believe the economy is in trouble. This data does a great of summarizing the mixed picture from all of the data we have regarding the future. While doom & gloom is the usual first reaction to slowing data, it is possible to have a pause in economic growth without falling into a recession. A slowing of growth is sustainable. This is true in the same way that lifting your foot from the accelerator pedal when driving slows your car without causing it to stop or reverse. The March data does not support the conclusion of peak inflation, and the March data does not support the conclusion of a definite recession either.
To end the week, on Friday, 04/22, we received the Institute for Supply Management’s (ISM’s) monthly Purchasing Managers Index Survey (PMI). This report includes both the industrial and services PMI. Both of these indicators have been above 50 for 22 months in a row, since May of 2020. A reading above 50 percent indicates these sectors of the economy are generally expanding. A reading below 50 percent indicates these sectors are generally contracting. According to the manufacturing PMI, this sector of the economy remains growing, though slower than it was in early 2021. On the services side, the March PMI reading indicates the services sector saw an increase in growth and activity.
International markets
Last week was tough on equities globally. The best of the worst was developed markets ex-US, followed by the US, emerging, and finally developed markets led the losses. Our year-to-date leaders, including Latin American and some emerging markets names, were down. Instead of the usual pattern we have been seeing this year-to-date, we saw strong bounces higher from some of the year-to-date losers including Nigeria and Hungary.
Fixed Income
Fixed income continued to decline globally. The fixed income markets are printing one of its worst performances on record. Last week, of the bond ETFs we track at East Coast Charts Research, 25 of the 31 printed 13 and 52-week closing lows. Long dated US Treasuries continued to sell off hardest here at home. The yield on the benchmark 10-year US Treasury Note closed the week at 2.9%, a reading last seen in 2018.
Commodities
Like equites and fixed income, commodities also had a tough week. Participation was muted and results were mixed. The year-to-date leadership of energy and agriculture were down last week. Livestock was the only area to print a weekly gain with a big performance from lean hogs. Heating oil was the only energy component to finish higher. Gold, copper, and silver miners gave back the most.
Gold closed down at $1,934 per ounce. WTI Crude Oil closed down at $102.07 a barrel.
Gasoline also finished last week slightly lower at $3.29 per gallon. The US Dollar Index finished higher at $101.21, a two-year high not seen since March 2020.
The Week Ahead
Next week, 04/25-05/01, may be the busiest week of the corporate earnings season. More than 180 companies will report. These companies include the largest of the S&P 500 companies: Apple, Amazon, Microsoft, Meta Platforms, and Alphabet. Some other names to watch include Kimco, American Tower, Boeing, Ford, Equity Residential, Chevron, Exxon Mobil, Coca-Cola, Raytheon, MasterCard, McDonalds, Twitter, and UPS.
In addition to earnings, we have some major economic data as well. These include March building permits, durable goods orders, new home sales, pending home sales, Q1 GDP, March personal consumption expenditures, personal income, April consumer confidence, and the April University of Michigan sentiment survey.
The question has become: What’s next for the major indices and the largest companies? Are we rangebound or in a downtrend? Is the selling coming to end or is it just beginning? The signals are deeply mixed. There is a chance this week will reveal what is next as the largest companies report their earnings. That said, I do not believe this is the best question to ask. An investor should be asking, how much risk do I want to tolerate right now.
Last week was likely painful no matter how you have chosen to express your investment thesis. Many professionals have taken profits and reduced their risk. The evidence is mounting that the US equity markets have peaked, for now, and we are building a market top. As always though, we must consider the other side. This is so we do not fall prey to confirmation bias, the tendency to form a conclusion and then look for supporting evidence instead of looking at the evidence and then forming a conclusion. There are several signals which tell us to keep an open mind to better-than-expected outcomes in addition to the loud voices championing worse-than-expected outcomes. Determine your tolerance for risk, and then have the discipline to follow through on that determination.
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