Stocks Under-appreciate the Impact of Credit Tightening

The market continues to hit a wall in the zone of 4200. And there is good reason for that... Investors are being asked to pay a large risk premium to own stocks. By my calculation - the forward PE is in the realm of 19x. That's far too high with interest rates at 5.00%; inflation more than twice the Fed's objective; and a real risk of recession. Today I will also spend a minute on the so-called banking crisis. I prefer to call it a crisis of confidence - as the US banking system is sound. However, we should expect many more regional bank failures - and that will lead to greater credit tightening. That's a negative for the economy and risk assets.

If the Apple Falls from the Tree… Does the Tree Fall?

Apple managed to beat very low expectations. However, revenue fell for the second consecutive quarter. Nonetheless, the stock was slightly higher on the news. Consider it a safety trade. More broadly, stocks fell today as they wrestled with the threat of more regional bank failures and a committed Fed. Here's my basic question: will we see three rate cuts before the end of the year? My view is we won't see a single cut (let alone three). If I'm right (and I may not be) - there will be a painful adjustment in the market.

“One and Done”… Not Yet 

The market wanted "one and done"... that was the expectation. Powell spoiled the party. Whilst the market expected a 25 bps Fed hike - what it did not know was whether any hike would be 'dovish' or 'hawkish'? For example, a dovish hike would be something like "we see the end of inflation... we're winning the fight". On the other hand, a hawkish tone would be sentiment to the effect of "it's still premature to make that call". We heard more of the latter... less of the former.

A Very Narrow Market 

Last week all eyes were on large cap tech earnings. They delivered a mixed bag... but on the whole 'better than feared'. Q1 earnings didn't fall off a cliff. Single digit growth (top and bottom line) was largely cheered - which highlights how low expectations were. Next week eyes turn to the Fed. The market has priced in a 25 bps hike for May - but will it be a 'dovish' hike - where they offer language to suggest a pause in June? Or will they say "there's more work to do"?

Winners & Losers Post Big Tech Earnings

What did we learn from big-tech earnings this week? In short, their earnings were "better than feared". However, they were far from stellar. The 'best of the best' could only muster single digit growth (Google was negative). The Search giant also disappointed on expense management. Amazon offered very soft guidance - with AWS growth expected to fall to deliver only 11% growth next quarter. That's a long way from its 40% growth a year ago. In summary, the challenges are not over for the sector - however investors are paying lofty premiums.

Big Tech on Deck

More than 25% of the total S&P 500 market capitalization rests with just 5 companies. And those 5 stocks are all in tech. This week we hear from 4 of those 5. The bar has been set extremely low - therefore it won't be too hard for these companies to exceed expectations. But don't expect earnings and revenues to be stellar. If anything - expect single digit growth from these names. However, the market will take that.

Banks Surge on Earnings…

JP Morgan kicked off Q1 '23 earnings season with a record beat. The US' largest bank by assets saw strong deposit inflows as it raised its guidance for net interest income. The question is how will regional banks report? It's likely to be a different story. Meanwhile we had a host of important economic data this week - showing inflation is cooling (albeit very slowly) and the economy is stalling. But there was little which will stop the Fed raising rates by 25 bps May 2nd...

Pop then Drop! Green Light for Fed Hike

Investors cheered the news of a slightly lower than expected CPI print from March. However, Core Inflation exceeded expectations and actually increased. That's important - as that's what the Fed are focused on. Here's the thing: with Core inflation running at 5.6% YoY - don't expect cuts anytime soon. It's almost 3x the Fed's target. Yes inflation is cooling - slowly - but not where the Fed need it to be. From mine, you can lock in another 25 bps for May 2nd. Bond markets see that. Equities are yet to get the memo

What Don’t We Know?

There are some things we know to be (mostly) true. Inflation is coming down. The Fed is closer to the end of its aggressive rate hikes. Growth is slowing. And earnings are likely to decline in Q1 (after a decline in Q4). But what don't we know? What are the potential unknowns that could trip the market up? Three things to consider.

Yields Plunge – The Signal It’s Sending

Bond yields are falling. And fast. The question is why? In short, the bond market is now pricing in a recession. It sees growth stalling... and believes the Fed will embark on rate cuts in the second half. But have equities got the memo? Not yet. They are trading at close to 19x forward earnings... as big tech drags it higher. From mine, I think the market feels vulnerable here.

Oil: Headed Back to $100?

November last year I felt there could be an oil supply shock in 2023 - sending the price back over $100. This week OPEC+ surprised the market by announcing cuts of 3.7M barrels of oil per day - around 4% of global supply. The price of WTI surged back above $80. I think we go higher from here... which won't help Jay Powell's fight with inflation.

A Great Quarter… Can it Continue?

The S&P 500 recorded an impressive gain of ~7% for the first quarter. Optimistic on the resolution of the banking crisis - and prospects of Fed rate cuts in the second half - the bulls have regained their mojo. But this raises a question: why would the Fed cut rates? It's not because inflation is under control. For example, could it be because the economy needs assistance? Stress in the financial system? A credit event? If so, is that a good thing? Here I also look at the monthly chart - it deserves our attention.