"They" tried to rally equities on Friday morning. "They" really tried. For about one half of one hour after the opening bell, stocks, including Apple (AAPL) were trading "in the green." That was it. For the day. Over the final six hours of the regular session, the beating was constant, and only accelerated as the weekend drew near. Two days. Was it enough to cool the beast?
Last week brought Amazon's (AMZN) first quarterly loss in seven years on the firm's slowest revenue growth ever. Last week brought what looked like a good quarter from Apple, but also a little bit of a warning from the greatest consumer electronics firm of all-time. A warning that Covid-related shutdowns in China would likely suppress current quarter revenue generation by up to $8B. Oh joy.
There's more. Much more. While China continues on with a zero-Covid policy that has certainly slowed economic activity, the war in eastern Europe appears more and more likely to last longer than many had hoped as the war has spread to both Russian and perhaps Moldovan soil.
The primary catalysts might have been domestic though. The FOMC meets this week, and will decide on monetary policy by this Wednesday, as last week... March New Home Sales disappointed, March Employment Costs soared well above already elevated expectations, April Consumer Confidence sagged, and Personal Income for March was absolutely trounced by March Personal Spending - absolutely trounced for a second month in three. This suggested a continuation of the four quarter streak of contracting discretionary income reported by the BEA in last week's first estimate of US Q1 GDP "growth".
Many economists tried to downplay last week's report that showed US Q1 GDP at -1.4% (q/q, SAAR) when the consensus of Wall Street economists had been at +1.1%, and the Atlanta Fed's GDPNow model had been at +0.4%. Can we really trust the reaction of any group that got it so wrong ahead of that report? Understand that this is what they do. They, as a group... flubbed badly their main occupational function. That implies that at least a few Wall Street economists just might be copying each others' homework. Blame it on a dearth of inventory building, they said, blind to the fact that inventory building had almost solely supported H2 2021 economic growth.
It's true that over the first quarter, public spending on almost all levels contracted, and that likely reversed this quarter. That said, there's no doubt in my mind that the necessary disappearance of helicopter money is taking its toll, and that certain individuals are spending money that they are not making just to try to maintain household standards of living. This is occurring just as the costs of running a household or running a business on credit are about to pop... just as the "slosh" of excess liquidity is about to progressively get less sloshy month by month.
The Beast checks in on Wednesday. Then, two days later... April Jobs Day. Job creation, and wage growth with no hope of printing anywhere close to the rate of year over year consumer level inflation. Just peachy. Inventory building... 4eva.
Equities
I know that you already know some of this. Let's go over it though. Let it sink in, so you/we are really cognizant of just how "risk-off" the mood has been as valuations reach lower in an attempt to find the correct level as monetary conditions tighten. The Nasdaq Composite gave up 3.93% last week, and now stands -21.16% year to date, as well as 26.01% off of the November high for that index. The Nasdaq Composite spit up 13.3% just in April alone, making the month ended last week the worst month for the index since October of 2008. The S&P 500 surrendered 3.27% over the past five days, taking the index down 13.31% for 2022. The S&P 500 is now -14.25% from its January high.
Perhaps the nastiest part of Friday's beatdown was the fact that the two major large-cap equity indexes closed near session lows and undercut lows established earlier in the week. For that matter, the Nasdaq Composite undercut the lows of both this past February and March as well as the low of March 2021. In fact, Friday knocked the Nasdaq Composite back into December 2020. That's right. All of 2021's Nasdaq wonderfulness has been repriced.
Readers will note that on Friday, the CBOE Options Total Put/Call Ratio ended the day at levels not seen since March 2020.
This happened as all 11 S&P sector-select SPDR ETFs closed out last week in the red. Ten of the 11 sector SPDRs closed down 1% or more, with only Materials (XLB) doing better at -0.86%. Eight of the 11 sectors gave up 2% or more last week, while six of 11 gave up 3%+, and four of 11 gave up 4%+. The meltdown was led for the past five days by Consumer Discretionaries (XLY) and the REITs (XLRE) , who were down 7.36% and 5.61%, respectively.
Bottom Line
China's Covid policy will continue to slow its manufacturing base as well as its ability to operate that nation's seaports. The war in Europe, including European and global actions taken to try to slow Russian aggression will continue to hamper world supplies of both energy and agricultural commodities. Nothing we can do, monetarily... to change those conditions, with the exception of US multinational corporations waking up to the fact that they need to shorten their supply chains. (As if the past two-plus years had not already taught that lesson.)
Regardless, all messages both subtle and far less than subtle have been signaled to the US financial marketplace to prepare the way for aggressive increases being made over a short-time to short-term interest rates coupled with a nearly equally aggressive reduction of central bank balance sheet holdings. Where do equity prices actually belong in such an environment?
According to FactSet, 55% of the S&P 500 has already reported first quarter performance. 80% of those companies have beaten earnings expectations, while 72% beat on sales. The (blended) rate of earnings growth for the quarter is currently 7.1%, up from 6.6% one week ago, but still the slowest pace of growth since 2020. Revenue growth for the quarter is currently running at 12.2%, up from 11.1% last week. These numbers are not awful 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. Earnings growth expectations for the current quarter (Q2), are now down to +5.5%, from an even 7% one week ago.
That said, the S&P 500 went out last week trading at 18.1 times 12 month forward looking earnings, which is below the five month average of 18.6 times. One must understand that the entire five year window for the most part has been a window including nothing but fiscal and monetary conditions that were at least "accommodative" and perhaps quite perverse in the resultant upward bias experienced in risk asset price discovery. The 10 year average forward looking PE (still using FactSet here) for the S&P 500 is 16.9 times. Is that where US equities are headed? Is that low enough? Is that too high? Conditions for price discovery have been skewed for so long that nobody knows how to properly price the purity of the free market. All hail purity. As if we'll ever find out.
Identifying Trend
Every new low for the indexes is both a new setback, as well as potential for opportunity. There will be a change of trend. The trend is currently lower. There will be rallies. Some of them will be aggressive. That is all well, good and quite tradable. Fact is that any rally needs to be followed by confirmation in order for a change in trend to occur. Picking bottoms is gambling without confirmation. Both the S&P 500 and Nasdaq Composite are closing in on being technically oversold. (Honest, they are not really there yet.) Nothing is 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 that there could be a sharp rally at some point this week. There will be plenty of news. Plenty of market moving keywords will be thrown around. Adapt. The algorithms will hunt you. Hunt them instead. They can not beat you on a regular basis if you become the wind. Don't be a wall. You make a stand here and there... oh, you might nail it. You might also get nailed. This environment (with an exception for professional short-sellers, but that's a very difficult skill to master) favors trading over investment. Until we see a change in trend that is followed by a volume based confirmation. No fear. No emotion. Your enemy has no fear. No emotion. Learn to fight this war. The last war is over.
Economics (All Times Eastern)
09:45 - Markit Manufacturing PMI (Apr-rev): Flashed 59.7.
10:00 - ISM Manufacturing Index (Apr): Expecting 57.7, Last 57.1.
10:00 - Construction Spending (Mar): Expecting 0.8% m/m, Last 0.5% m/m.
The Fed (All Times Eastern)
Fed Blackout Period.
Today's Earnings Highlights (Consensus EPS Expectations)
Before the Open: (MCO) (2.89)
After the Close: (CAR) (3.54), (DVN) (1.76), (NXPI) (3.19)
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