The breaking news is that the Biden administration has engaged with a number of Asian and Oceanic nations in a new "Indo-Pacific Economic Framework" (IPEF), which appears to be headed toward forming a trade pact, though this framework does not (at least not yet) include any tariff reductions. The 13 nations involved include the U.S., Australia, India, Japan, South Korea, New Zealand along with seven southeast Asian nations. Those seven are Brunei, Indonesia, Malaysia, The Philippines, Singapore, Thailand, and Vietnam. Together these nations account for 40% of global GDP.
The framework, which one would think is designed to counter Chinese dominance in the region, is focused at the onset on four constructive "pillars" and members will be asked to make commitments toward making progress within at least one of the four. Of course there is little clarity around what if anything is binding or non-binding, and getting somewhere quantifiable could take time. (So, basically, this is just a start, with no immediate impact.) However, those four pillars are:
1) Connected Economy... digital trade, cross-border data flow, labor issues, corporate accountability.
2) Resilient Economy... supply chains, prevent disruptions, improve early warning systems diversification.
3) Clean Economy... address climate change, improve sources of renewable energy, set efficiency standards.
4) Fair Economy... address money laundering and bribery issues and set effective tax regimes.
Notably, two nations were not invited, those being China and Taiwan. Bloomberg News reports that a senior Biden administration official said that the U.S. did not invite China to join this framework partly because the White House believed that China would have a hard time meeting the standards being set. In response, Beijing's Foreign Minister, Wang Yi said flatly that the IPEF was "doomed to fail."
While not inviting Taiwan to join this framework despite at least half of the U.S. Senate urging the president to do so, President Biden, speaking from Tokyo, did pledge to defend the autonomous island nation/province should the need arise. When that question was asked specifically, Biden said "Yes, that is the commitment we made."
Asian equity markets and U.S. equity index futures had traded higher overnight in response to these headlines that really don't seem to accomplish much more than signal long-term intentions. Those markets seem to have peaked as the wee hours have passed. It will be very interesting to see if this at all helps U.S. markets to build on the late Friday surge across U.S. markets that appeared to be driven by a combination of short coverings, and options expirations at the time.
Last Week
From a macroeconomic perspective, the week appeared to get off to a decent start. Both April Retail Sales and April Industrial Production printed in robust fashion, and that was about all she wrote. However, away from those two reports, it got ugly.
Regional manufacturing based surveys compiled by both the New York and Philadelphia Feds badly missed expectations with New York specifically landing in contractionary territory. Then, first time jobless claims "popped" for the first week in some time. Then we get to housing.
On the housing front, April Housing Starts and April Existing Home Sales both not only fell short of consensus, but both extended their declines from March. In addition, building permits for single-family units showed a decline in every U.S. region as mortgage applications dropped 11% week over week.
It wasn't all about the macro, however. It was also about corporate execution in a tough and getting tougher environment. Both Walmart ( WMT) and Target ( TGT) fell short on profitability as margin pressures surprised management at both companies. Both also painted a less-than-exciting picture of their respective futures.
Though Friday's late surge pulled the S&P 500 out of "technically defined" bear market territory, and most of your favorite U.S. equity indexes closed near the unchanged mark, the week as a whole was nasty. Both the S&P 500 and Nasdaq Composite are running with losing streaks that now number seven weeks. The S&P 500 gave up 3.05% last week, and is now down 18.14% year to date. The S&P 500 stands -19.03% from its January high.
The Nasdaq Composite surrendered another 3.82% last week, and is now down 27.42% for 2022. The Nasdaq Composite is now an even 30% off of its November high. The Russell 2000 (small caps) was actually our top-performing major equity index last week, losing just 1.08%. The Russell 2000 is down 21.02% for the year so far and is also now 27.8% off of its November peak.
For the week, eight of the 11 S&P sector-select SPDR ETFs lost ground, with consumer-related groupings suffering the most severe beatings. Consumer Staples ( XLP) , usually considered to be a defensive sector, gave up 8.12%, while Consumer Discretionaries ( XLY) took a drubbing of 7.82%. Energy ( XLE) , led the three sectors that shaded green with a gain of 1.23%.
Beyond equities, the U.S. dollar weakened a bit last week and is showing further weakness on Monday morning. Gold strengthened, Bitcoin traded on both sides of $30K (per token), crude traded sideways, and U.S. Treasuries showed some strength as U.S. economic data portrayed more weakness than strength.
The Week Ahead
While President Biden tours Asia, and the "phony baloney" crowd converges on Davos trying to answer questions around the pandemic-driven failures of 21st Century globalism, there are several actual high-impact events going on this week.
Probably as key as any market-moving events this week as anything else will be the JP Morgan 50th Annual Global Technology, Media and Communications Conference in Boston. The event kicks off today (Monday, May 23) and runs through Wednesday, May 25. Key presentations are expected to be made by Visa ( V) , Intel ( INTC) , eBay ( EBAY) , Lyft ( LYFT) , Alphabet ( GOOGL) , Verizon ( VZ) , Comcast ( CMCSA) , and Cisco ( CSCO) .
Microsoft ( MSFT) will also kick off that firm's three-day "Build" conference on Tuesday (May 24). The conference focuses on code and application development and has been used by Microsoft in the past to showcase high-profile updates to a number of its software services.
On the central banking front. Fed Chair Jerome Powell will speak at lunchtime on Tuesday, while St. Louis Fed Pres. James Bullard tries not to ruin your three-day weekend with a Friday morning public appearance. The Minutes of the FOMC's May policy meeting will also be released on Wednesday afternoon. There is some belief that a conversation could be revealed concerning just where the potential level of neutral rates might be.
Though earnings season is down to tags' ends, the week ahead does not thirst for high-profile names to report. While Nvidia ( NVDA) is probably the headline driver on Wednesday, the week also offers investors quarterly numbers from Zoom Video ( ZM) tonight, Best Buy ( BBY) on Tuesday morning, Dick's Sporting Goods ( DKS) on Wednesday morning and both Costco ( COST) and Ulta Beauty ( ULTA) on Thursday.
Earnings & Valuation
According to FactSet (because that's who I rely upon), 95% of the S&P 500 has now reported for the quarter with 77% of those companies beating earnings expectations and 73% beating Wall Street expectations on sales. Currently, S&P 500 earnings grew 9.1% (y/y) for Q1 on revenue growth of 13.6%, while expectations for the current quarter have dropped to earnings growth of just 4.1% on revenue growth of 9.7%. Expectations from the full calendar year are largely unchanged over the past few weeks at earnings growth of 10% and revenue growth of 10.2%.
This has left the S&P 500 trading at 16.4 times 12-month forward looking earnings, which is well below the five-year average of 18.6 times and half of one full multiple below the 10-year average of 16.9 times. The most highly valued sector is currently Consumer Discretionaries, trading at 22.5 times, followed by the Utilities ( XLU) at 20.1 times. Energy remains the least valued sector, trading at 10.1 times FPE, with the Financials ( XLF) the second "cheapest" at an even 12 times. Technology ( XLK) ? Glad you asked... trading at 19.6 times, versus a five-year average of 21.6 times, and a 10-year average of 18.1 times.
Thoughts and Trades
I remain "cashy" as I tackle the week ahead. Prior to reversing higher on Friday both the S&P 500 and Nasdaq Composite took out their reversal lows from May 12, thus officially ending what had been dead already -- the attempt to rally markets off of that momentum.
Markets now have a new reversal to think about, but I think I have to be convinced before I can believe. What that means is that a base of support has to be built before I can throw increased capital at U.S. large-cap equities in any kind of broad sense.
I made use of last week's weakness in Staples to initiate/add to long positions in Colgate Palmolive ( CL) , PepsiCo ( PEP) , and Procter & Gamble ( PG) , while also adding to my highest conviction semiconductor name, Advanced Micro Devices ( AMD) as well as both Nvidia ( NVDA) and Marvell Technology ( MRVL) ahead of this week's numbers. I also initiated Costco ( COST) in expectation that this firm, while not immune, managed to execute at a higher level in this environment than either Walmart or Target. Warning, Costco still trades at 31 times, making this a little risky.
As far as exits go, I took my leave of both Walmart (in sloppy fashion) and Kohl's ( KSS) , the latter of those two at a loss.
Economics (All Times Eastern)
No significant domestic macroeconomic data-points scheduled for release.
The Fed (All Times Eastern)
12:00 - Speaker: Atlanta Fed Pres. Raphael Bostic.
19:00 - Speaker: Kansas City Fed Pres. Esther George.
Today's Earnings Highlights (Consensus EPS Expectations)
(WMT, GOOGL, MSFT, NVDA, AMD, MRVL and COST are holdings in the Action Alerts PLUS member club . Want to be alerted before AAP buys or sells these stocks? Learn more now. )
