Running awry, Mind unwound
Grip on reality, hands unbound
Older today than ever before
An unlocked door
Evolution so proud
Trespassed? But when?
Uncaged, I see
Will not crash and burn
No, can not
Why? Because only now...
Somehow. Relearning to learn
The month of April opened with an angry cry. Only one where, but so many why's. The crowd cast a glance at former Fed "perma-dove" Lael Brainard who showed the world a new more hawkish side, thus rendering FOMC posture united in the presentation of this more hawkish front. That came just seconds, minutes, hours or a day ahead of the release of the FOMC Minutes of the March meeting. Alas, there would be a "quantitative tightening" announced in short order, most likely at the early May policy meeting.
What "quantitative easing" is, is simply a roll-off or run-off of maturing securities from the Fed's balance sheet, to the tune of a proposed $95B per month, in the most market-friendly, non-violent way possible. For this quantitative tightening is not the true opposite of "quantitative easing", not in the least. For one is but an intervention at the point of sale, directly impacting not just the monetary base, but also impacting price discovery and the ability of all subsequent price discovery mechanisms across a number of markets, affecting the aggregate ability to assess or to "price in" risk.
The other? Surely tightens monetary conditions in that the roll-off reduces the monetary base. At some point, the entirety of the slosh would if the program persists, simply slosh less. There is however, no intervention in price discovery. There is no artificial force overtly meant to impact said price discovery in one way or the other. Only an outright sale of these debt securities could do that.
There is talk, or rather Fed chatter, that should the program run effectively without burning down the economy, that direct sales of mortgage backed securities could be added to the "program" in order to help the central bank get down to a "Treasuries only" portfolio sooner rather than later. While I do agree in concept to trying to make up for error by simply acting in reverse, I doubt it will ever be that easily accomplished. For now, we'll guess at the interest rate equivalent of a roll-off spread over time, as we have in the creation of a neutral rate. It will be as if one saw a sasquatch riding a unicorn into the sunset. How nice.
So Much More
While Fed posturing might be seen as the primary catalyst for all that damaged US markets last week, there was so much more that caused investors/traders to pressure both Treasuries and equities. There were calls up and down Wall Street and out of academia for if or when US and global economic growth goes into contraction. All... as Russian forces retreat from northern and central Ukraine in the wake of their apparent defeat in the recent battle of Kyiv. There had been a slimmer of recent hope that perhaps military defeat on top of global economic pressure had softened Russia's position.
Instead, what appears to be occurring is that the Russian Army is regrouping in preparation for a new offensive against the eastern, Russian speaking areas of Ukraine, and have placed a new general with a reputation earned elsewhere for striking civilian targets, in command. This would indicate that global shortages of energy and agricultural commodities would continue and possibly worsen.
On top of that, parts of China are still mired in Covid-related lockdowns. Reports show that activity at Shanghai area ports was down 40% week over week for the first week of April. Not so nice.
About that first full week of April? The S&P 500 surrendered 1.27% for the five day period, placing the US market's broadest large-cap equity index among the week's "outperformers." This left the index -5.83% year to date. Sledding was much tougher for the Nasdaq indexes. The Composite gave up 3.86% for the week, and now stands -12.36% for 2022, while the 100 (which includes no financial stocks) surrendered 3.59% for the week and is now down 12.21% for the year so far.
Seeking out equity indexes more directly impacted by the prospects for economic growth, the Dow Transports again took the worst beating anywhere on my screen, -6.71% for the week, while the S&P Mid-Cap 400 took a 3.43% kidney punch. Among small-cap indexes, the Russell 2000 took a 4.62% smackdown over five days, while the S&P 600 experienced a 4.39% slapfest of its own.
For the week, incredibly... five sector-select SPDR ETFs did shade green, which from a distance, doesn't seem so bad. Fact is that upon inspection those five sectors were Energy (XLE) for obvious reasons and the four sectors considered to be defensive in nature . The Industrials (XLI) took a 2.52% pounding while both the Discretionaries (XLY) and Technology (XLK) surrendered more than 3%.
Hey, at least the slope of that Treasury yield curve steepened. While much of the curve remains mangled, the Ten Year Note has remained univerted versus the Two Year Year...
... while the all-important spread between the Ten Year Note and Three Month T-Bill has not even come close to inverting and appears only to lengthen.
... Free market pricing for the short-end of the curve is apparently a healthy development. As are lower prices for the long-end. Healthy and painless, however, are not always the same. Tomorrow's adventures and those of the days beyond will be yours and mine to share. For joy, for joy.
Riddle Me This, Batman...
What is the only market impacting force that could possibly distract the universe of heat seeking, keyword reading, high-speed algorithms from the Fed, the macro, the war in Europe, and the spread of Covid? Well maybe nothing. Then again, maybe earnings season. The season kicks off this week, with the reporting of several large financials such as JP Morgan (JPM) , Citigroup (C) , Wells Fargo (WFC) , BlackRock (BLK) , Goldman Sachs (GS) , Morgan Stanley (MS) , and others
How does this earnings season shape up? According to FactSet, earnings growth estimates for the S&P 500 for the first quarter have been coming in (moving lower) over the past few weeks, and now stand at an aggregate 4.5% on revenue of 10.7%. This earnings growth, if realized, would be the slowest growth for this metric since Q4 2020. However, (S&P 500) earnings growth for calendar year 2022 have been finding their way slightly higher at an estimated 9.8% on revenue growth of 9.5%.
Those who have not been following along may find sector-specific earnings estimates eyebrow raising to say the least. Sticking with FactSet (because that's who I use), earnings estimates for the Energy sector are for an incredible growth rate of 252%, well ahead of expected second and third place finishers... Industrials at 31.7%, and Materials (XLB) at 30.9%. Four sectors are expected to post year over year earnings contractions this quarter, with Financials (XLF) being the anchor weighing upon overall performance at -25.7%. Discretionaries, Communications Services (XLC) , and Staples (XLP) would be the other sectors sporting projected earnings minus signs.
As far as expected revenue generation for Q1 is concerned, it is again Energy in the lead at +44.9%, with Materials in second place at +20.6%. Only the Utilities (XLU) are expected to post revenue contraction for the quarter, which I think foretells a bit of what we will likely hear regarding market-wide margin pressure.
The S&P 500 wakes up this morning trading at 19.2 times (12 month) forward looking earnings versus a five year average of 18.6 times. So, really only slightly over-valued when measured against recent historical norms. However, this metric for valuation is all over the map when broken out by sector. For sectors led by Discretionaries (27.1 times) trade at more than 20 times. Tech, because you asked, is priced at 23.6 times. Interestingly, Energy trades at just 11 times. Room to run, even now? Would you bet against it?
There are only two sectors trading at a discount to their respective sector specific five year averages. Industrials trade at 19.3 times versus a five year average of 19.4 times, while Materials trade at 15.7 times versus a five year average of 17.7 times. Now, the ten year average forward looking PE for the S&P 500 is just 16.8 times. Are any sectors currently priced below their sector specific ten year averages? Yup. Two. Materials make this list as well. You already know the sector trades at 15.7 times. That falls short of a ten year average of 16.1 times. Now, we turn to Energy. I told you above that Energy trades at 11 times. That's versus a ten year average of 15.8 times.
So again, can Energy continue to run from here? Undervalued, cash flow positive, willing to return capital to shareholders? That's all up to the ESG policy driven portfolio managers of the sector allocation universe. Not if they don't start racing each other to the point of sale. Personal thoughts? The three day weekend ahead is a risk with Loretta Mester speaking late in the day on Thursday. That said, horrendous performance for the big banks is already priced in.
I would not be surprised to see a relief rally in some of these names either in response to the numbers or next week. I am going into the season long Wells Fargo and Bank of America (BAC) as I see these two as more reliant upon traditional banking than their peers. Not that I see the yield curve completely unscrewing itself, but mortgage rates are already higher and I don't see the banks more reliant upon trading and investment banking punching well above their weight this quarter. Just a thought.
Economics (All Times Eastern)
No significant domestic macroeconomic data scheduled for release.
The Fed (All Times Eastern)
09:30 - Speaker: Atlanta Fed Pres. Raphael Bostic.
09:30 - Speaker: Reserve Board Gov. Michele Bowman.
12:40 - Speaker: Chicago Fed Pres. Charles Evans.
Today's Earnings Highlights (Consensus EPS Expectations)
No significant quarterly earnings scheduled for release.
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