The rally in the markets that started in mid-June is fading. The S&P 500 fell for the second week in a row tacking on a 4% decline after the previous week's 1.2% fall. Friday's large selloff was triggered by a warning from the chairman of the Federal Reserve that the fight against inflation could lead to "some pain" for the economy.
This is a topic we have discussed many times since the commencement of monetary tightening in these columns. However, that blunt admission from the central bank sent the Dow down by more than 1,000 points Friday, as equities ended the trading week on a sour note.
Second quarter earnings season is largely over. One of the themes of the past quarter was how many companies lowered forward guidance.
Salesforce (CRM) being one prominent example last week at the tail end of second quarter reporting. We also had many companies like Microsoft (MSFT) state they were 'curtailing' hiring plans. It's hard to blame companies for pulling back right now.
GDP has contracted for two straight quarters, which until recently was the definition of a 'recession'. I believe companies will be hard pressed to beat reduced expectations in the third quarter. I also think we will see more widespread layoffs in this quarter.
The third quarter will be the sixth straight quarter where the average consumer will have lost buying power against inflation. Given the consumer is 70% of economic activity, I don't see how the economy avoids an 'official' recession over the next year, especially as the Federal Reserve continues to hike interest rates.
Value stocks should outperform growth stocks for the remainder of 2022, as growth will probably be hard to come by and I don't think companies are done lowering their sales growth outlooks.
Obviously there are some exceptions, especially for names that should continue post solid growth in a low growth environment. Finding 'off the radar' names that can deliver solid earnings and revenue growth will be key to managing one's growth portfolio. Healthcare would be one sector that is likely to be much more recession proof in regards to growth than most of the market.
One name I am high on here is ANI Pharmaceuticals (ANIP) . The company should post approximate sales growth of 40% this fiscal year, powered by the launch of Cortrophin, which the company recently bumped up forward revenue guidance around. Growth should slow to high teens in FY2023, but analysts project profits will more than double next fiscal year. Valuation of 12 times those earnings doesn't seem unreasonable, making ANI Pharmaceuticals a good bet over the next year even in an uncertain economic environment.
And those are some growth names that should be able to deliver the goods as we start a new trading week amid much economic uncertainty.