Sonnet 116 (excerpt)
Let me not to the marriage of true minds
Admit impediments. Love is not love
Which alters when it alteration finds,
Or bends with the remover to remove:
O, no! It is an ever-fixed mark
That looks on tempests and is never shaken;
It is the star to every wandering bark.
- William Shakespeare
Is It Love?
The Nasdaq Composite had been down 8.5% for the week at Thursday's regular trading session nadir. The S&P 500 had made short work of the 4,000 level, trading well below 3,900. We spoke of the ferocious bullish reversal experienced by equity markets last Thursday on Friday morning. With much anticipation, we looked to see if the seedlings of some kind of a "change in trend" could take hold.
Plenty of wood had been chopped. April consumer prices, as well as April producer prices had hit the tape (at both the headline & core) off of their March peaks, but also a bit hotter than what had been consensus view. Fed Chairman Jerome Powell, who is among a plethora of Fed officials set to speak publicly this Tuesday, spoke last week. He appeared a little less certain, or even less confident than he had a week earlier when discussing the Fed's ability to tame inflation, as well as the central bank's ability to engineer a soft landing.
Oh, did I mention the utter collapse of the entire cryptocurrency complex? As instability became the hallmark of most "stable coins"... somehow, backing imaginary currencies with other imaginary currencies had failed to produce a consistent and predictable outcome under stress. Who knew?
Investors flocked back into the longer end of the US Treasury yield curve, flattening that curve, and truly pressuring the Ten Year/Three Month spread...
While nowhere near inversion, one does notice when the "Fed recognized" the most accurate predictor of sustained US economic contraction available, manages to give up more than 35 basis points in little more than a week's time. That said, this happened coming off of an intense run, and the spread did appear to find support at its 50 day SMA.
So, What About Stocks?
What about 'em? The S&P 500 rallied 2.39% on Friday, to close down 2.41% for the week. The S&P 500 now stands down 15.57% for 2022. The Nasdaq Composite rallied 3.82% on Friday, to close down 2.8% for the week. The Nasdaq Composite now stands down 24.54% year to date and 31.6% off of its November high. The Russell 2000 rallied 3.06% on Friday to close down 2.55% for the week. The Russell 2000 now stands down 20.16% for this year, and 27.1% off of the November high for that index. Stocks, spoken of broadly, have posted six consecutive losing weeks. That's the longest such weekly streak since 2008.
All 11 S&P sector-select SPDR ETFs closed in the green for the day on Friday, with all 11 gaining at least 1%. However, 10 of the 11 sector SPDRs closed in the red for the week, with only Consumer Staples (XLP) shading green (+0.3%) over the five day period. Seven of these 11 funds gave up at least 2% for the week and four of the 11 surrendered at least 3% with the REITs (XLRE) , and Consumer Discretionaries (XLY) taking the brunt of the selling.
Breadth was fantastic on Friday. Winners beat losers at the NYSE by a rough 4 to 1, and at the Nasdaq market site by about 3 to 1. Advancing volume took a 91.5% share of composite NYSE-listed trade, and 88.5% of aggregate Nasdaq-listed action. The caveat, as it often is... at least lately when seeking some kind of confirmation of a directional turn for these markets, has been a lack of trading volume. The same is true of this most recent attempt. Aggregate trading volume decreased significantly on Friday from Thursday (-18.4% for NYSE-listed names, -11.9% for Nasdaq-listed names). In fact, for constituent member names of the S&P 500, Nasdaq Composite and Russell 2000, aggregate trading volume on Friday was the lowest trading volume of the week. Put plainly, Friday's rally confirmed nothing.
We have discussed the suddenly not so confident sounding Fed. The Atlanta Fed's GDPNow model still shows second quarter US economic growth at 1.8% (q/q SAAR). While quite paltry coming off of a Q1 print of -1.4%... this would keep the US out of officially going into recession. The Atlanta Fed will update the model twice this week, after Tuesday's results for April Retail Sales and April Industrial Production, and then again after Wednesday's print for April Housing Starts.
Before we even get to Tuesday, we must discuss Sunday. On the CBS News show "Face The Nation" with Margaret Brennan, Goldman Sachs (GS) Senior Chair (and former CEO) Lloyd Blankfein considered there to be a "very, very high risk" of recession in the US. Blankfein added, "If I were running a big company, I would be very prepared for it. If I were a consumer, I'd be prepared for it." Blankfein did discuss the tools that the Federal Reserve has on hand to tackle inflation, and referred to his firm's economics team during the interview... "Our economists think the chance of recession here in the US over the next few years is about 30%. But again, that's a big unknown, and there's a wide disparity of outcomes, so we're all going to watch that closely."
Elsewhere on Sunday, China's National Bureau of Statistics released its monthly batch of data-points for April and it is clear that Covid-related shutdowns have had an even greater than anticipated negative impact on Chinese economic performance. For the month, Chinese Retail Sales hit the tape at -11.1% y/y versus expectations of -6.2%, while April Industrial Production printed at -2.9% y/y versus expectations for +0.5%. Fixed Asset Investment (+6.8% versus expectations of +7%) and China's Unemployment Rate (6.1% versus expectations of 6%) both missed their marks as well, but less dramatically so. The magnitude of those drops for Retails Sales and Industrial Production, though, is just stunning.
Earnings Season Update
Earnings season winds down this week, with really only stragglers coming in after that. This week's focus will be on the retailers with rivals such as Walmart (WMT) and Target (TGT) , as well as Home Depot (HD) and Lowe's (LOW) reporting among others. According to FactSet, with 91% of the S&P 500 having already reported, 77% of those companies have reported an upside earnings surprise and 74% an upside revenue surprise.
The blended (reported & expected) rate of year over year Q1 earnings growth stands at 9.1% for a second week in a row, as the blended rate of revenue growth increased slightly to 13.4%. Analysts look for margin pressures to be the talk of the second quarter as the consensus for Q2 earnings growth has now dropped to 4.4% from 4.8% last week and 5.5% the week prior to last week. This, while expectations for Q2 revenue growth have expanded slightly from 9.8% to 9.9%. Sticking with data provided by FactSet, analysts see full year earnings growth at 10.1% on revenue growth of 10.2%.
Interestingly, the S&P 500 went out last week trading at just 16.6 times (12 month) forward looking earnings. This is well below the S&P 500's five year average of trading at 18.6 times, and for the first time in a long time... also below the S&P 500's ten year average of trading at 16.9 times. Five trading days ago, the S&P 500 traded at 17.6 times forward looking earnings.
Well, my first thought is that the New York Rangers somehow managed to take down the Pittsburgh Penguins in overtime of game 7 after having been down three games to one earlier in the series and looking quite awful up to that point.
After that, we turn to our beloved marketplace. I do think that there is a good chance that equities in general, while not truly technically oversold, have a good chance to trade higher this week, at least for a little bit. I am not all in. I remain "cashy" and will far more easily trade this market than invest in it. It's just safer in a market that can not be trusted without a volume based confirmation of a change in trend. We do not yet have that.
That said, one still wants to be smart about adding risk at a discount to names one still has some belief in for one reason or another. Last week, I added to Apple (AAPL) , Walmart, General Dynamics (GD) , Kohl's (KSS) , and Advanced Micro Devices (AMD) on weakness. Both Walmart and Kohl's report this week.
Economics (All Times Eastern)
08:30 - Empire State Manufacturing Index (May): Expecting 15.8, Last 24.6.
16:00 - Net Long-Term TIC Flows (Mar): Last $141.7B.
The Fed (All Times Eastern)08:55 - Speaker: New York Fed Pres. John Williams.
Today's Earnings Highlights (Consensus EPS Expectations)
Before the Open: (WEBR) (.18)
After the Close: (TTWO) (1.03)