Monday morning. Yields have moved higher since Sunday (and Friday) night at the longer end of the US sovereign curve. That would largely cover everything from the US Seven Year Note out to 30 Year Bonds. Equity index futures were trading lower. Monetary conditions are apparently continuing to tighten themselves as they had last Thursday and Friday, forcing a condition that felt something like a "free-fall" on domestic equity markets last Thursday.
Panic feels different in 2022 than it had in other market shocks that I have seen over the course of a long career. Of course the fact that markets involve very little human interaction at the point or points of sale in 2022 has created this characteristic, making the interpretation of what capitulation will look like or when capitulation will happen more difficult to define than probably ever before.
No, I do not think we have seen broad equity market capitulation just yet. There may have been capitulation for some, but broadly speaking, I think most market participants are probably still either in "desperation" mode, "panic" mode, or somewhere between the two. Panic turns into capitulation, but not until almost everyone is on board, and while valuations have certainly come in a great deal, would anyone out there refer to the stock market as "dirt" cheap? I would think, though I could be mistaken... that stocks would at least briefly be eye-poppingly inexpensive at that point where there has been capitulation and said capitulation has run its course.
The Wild Week That Was. The week started innocently enough. Monday. Tuesday. Equity prices worked their way slightly higher coming off of April 2020, the month of pain. Coming ahead of Wednesday's FOMC policy statement. That statement came and went on Wednesday afternoon. Markets (and citizens) got what they had bargained for. The Fed had taken its target for the Fed Funds Rate 50 basis points higher, and indicated that there was plenty more where that came from. The Fed also announced that their quantitative tightening program would kick off on June 1st. That was all priced in.
The surprise came during the press conference when Fed Chair Jerome Powell appeared to tentatively rule out any hikes of 75 basis points at any upcoming meetings. That was all markets needed to hear. Yields moved lower. US equity markets became like a rocket ship over the final 90 minutes of that Wednesday regular session.
By Thursday, markets had in aggregate, rethought their initial response and seemingly decided that the Chair's words were too dovish. Yields moved sharply higher as the bond market decided to tighten monetary conditions on its own, and equities gave back even more on Thursday than they had gained on Wednesday. Markets were not done.
Friday brought us the results of the Bureau of Labor Statistics twin employment based surveys for the month of April. The results of these surveys were mixed at best. While the establishment survey showed robust job creation, the household survey showed outright contraction in job growth. In addition, wage growth, the unemployment rate, participation and the average workweek, while certainly not weak, disappointed relative to expectations. Again, markets sold off hard, but then rallied sharply into Friday's closing bell, turning a deeply red session into "just" a red session. Trading volumes increased towards the end of the week.
The week felt awful in my opinion. Yet, the results were really anywhere from "down small" for some large-cap equity indexes to down significantly for others. While the Dow Industrials gave up 0.24% for the week, and the S&P 500 gave up 0.21%, the Dow Transports actually closed out the five day period 0.24% higher. The Nasdaq siblings took a bit of a beating, as the Composite surrendered 1.54% and the 100 but 1.25%. Beyond large-caps, the S&P Midcap 400 lost 0.77%, while the Russell 2000 lost 1.32%. Year to date, the Nasdaq Composite has given back 22.37%, and now stands 25.1% below its November high. The S&P 500 is down 13.49% this year, and closed on Friday down 14.4% from its January high.
Performance across sectors could not be more uneven in how markets played out last week. Five of the 11 S&P sector-select SPDR ETFs shaded green for the week, with Energy (XLE) way out in front at +10.34%. The Utilities (XLU) took second place at +1.33%. At the other end of the spectrum, the REITs (XLRE) finished the week in the cellar at -3.8%, with Consumer Discretionaries (XLY) and Consumer Staples (XLP) giving up 2.9% and 1.18%, respectively.
First quarter earnings, have for the most part, gone rather well. FactSet reports that with 87% of the S&P 500 having already reported, that the blended (reported & projected) rate of earnings growth is now up 9.1% over Q1 2021 on (blended) revenue growth of 13.3%. These metrics are up from 7.1% and 12.2% just one week ago. Projections for Q2 2022 are now "down" to earnings growth of 4.8% on revenue growth of 9.8%. One week ago, the outlook for the second quarter stood at 5.5% growth on 9.7% growth. Still with FactSet, consensus opinion of full year 2022 stands at earnings growth of 10.1% on revenue growth of 10.0%.
The S&P 500 closed out last week trading at 17.6 times forward looking earnings. This is now well below the five year average of 18.6 times, and not too far above the 10 year average of 16.9 times. Four sectors are still trading above their five year averages... Consumer Staples at 21.5 times (versus 19.5), Real Estate at 20.3 times (versus 19.6 times), Utilities at 20.3 times (versus 18.4) and Energy at 10.3 times (versus 6.4). With the bulk of retailers still to report their quarters, earnings will slow down this week, particularly late this week.
The Week Ahead
Russia remains unpredictable and becomes ever more so, as its conventional military forces appear to have been humiliated in Ukraine. Covid in China remains as much an economic problem as it is a public health issue. That said, Covid seems to be becoming an economic activity slowing problem once again in the US northeast and elsewhere.
All that said, the week ahead, from a markets perspective probably focuses on two items. The earnings highlight will come on Wednesday evening as The Walt Disney Company (DIS) reports. The event will be watched not just for the firm's financial performance, but also in case there is anything said in the press conference regarding the firm's ongoing political battles.
Prior to that earnings release, on Wednesday morning, the BLS will post April CPI (consumer price index) data. Expectations are that the pace of headline consumer level inflation decelerated slightly in April to 8.1% (y/y) from a March peak of 8.5% y/y. Core inflation is seen having advanced 6.0% in April, off of the 6.5% paced of March.
The US economy may or may not be in recession. We know that activity contracted somewhat severely in the first quarter. Currently (it is still absurdly early), the Atlanta Fed's GDPNow model shows growth of 2.2% for Q2. The US may very well escape recession this year, putting it off until early next year. Other global economies may not be so lucky.
As the Fed works toward raising short term rates and pulls its artificial support for the Treasury yield curve, the curve should continue to steepen. While this is actually healthy, it will also make it more painful, and more difficult for businesses and households to increase liquidity. Less slosh, in other words.
I think it likely or at least possible that our friends at the FOMC find out that the neutral rate could be significantly lower than many of them suspect. They also may find that even successfully reining in consumer level inflation and stimulating the economy do not go hand in hand, as correcting for policy excess does not correct for scarcities created through either warfare or plague. I suspect that even if one misses a supposed bottom, it will not be like one missed the last train to anywhere. That individual may get more than one opportunity.
That said, Adapt. Take what's given. If it's safer for now to be less extended in a broad sense and trade more than invest, as I have been saying for months, then that's the environment provided. Fulfill your role within.
- Rivian Automotive's (RIVN) insider lockup period expired on Sunday. CNBC reported over the weekend that Ford Motor (F) moved to sell 8M shares of its stake (102M) through Goldman Sachs (GS) . From the same story, JP Morgan (JPM) was said to be looking to move a block of 13M to 15M shares for an unknown seller. Both blocks were said (in the article) to be priced at $26.90. RIVN closed at $28.79 on Friday.
- Stand alone (as in "not in the mall") retailer Kohl's (KSS) will hold the firm's annual meeting this Wednesday (May 11th) with activist investors pushing for a board seat. In my opinion, the shares are likely to react to shareholder voting at the meeting. The stock went out at $55.73 on Friday. There have been recent rumblings of bids for the firm that approached $68 that nothing came of. This will be interesting in the least.
Note To Readers: My ability to write to you will be sporadic this week, particularly early this week, as a close family member for whom I am the legal healthcare proxy is undergoing major surgery this morning in order to treat a life threatening illness. That has to be my priority and focus at this moment. I will continue to write to you as opportunity presents. I thank you in advance for both your patience and your prayers.