Published April 22, 2022
A couple of odds and ends from our reading this week. First, Delta’s observations from the beginning of this earnings season. We note that investors are clearly on edge as the Fed drives interest rates higher, removing the free money that has served as market rocket fuel for the past few years. It will take a few months for the impact of that to shake out. Some argue that a recession is the ultimate result of the Fed’s actions.
Weigh that view against the datapoints below. Here is Delta’s take:
“First quarter 2022 earnings season has begun. In the first days of earnings season, most major banks report. We learned from JPMorgan Chase, Wells Fargo, Bank of America, Citigroup etc. that consumers are spending their accumulated excess $2 trillion held in savings and checking accounts. Businesses used Covid to refinance their debt and they generally have strong income statements and balance sheets.
Jamie Dimon, CEO of JPMorgan went so far as to say the strong underlying growth is not stoppable. “What I have pointed out in my letter is very strong underlying growth, right now, which will go on. It’s not stoppable. The consumer has money. They pay down credit card debt. Confidence isn’t high, but the fact that they have money, they’re spending their money.” – JPMorgan (JPM) CEO Jamie Dimon. Wells Fargo separately reported credit card spending up 33% from a year ago.
With strong consumer demand, manufacturing is strong. The New York Fed Empire State manufacturing index came in last week at the second highest level ever. Capacity utilization surged to 78.3% in March, up from 77.7% in prior month and now at strongest since January 2019. Higher capacity utilization is good for margins and overall profit growth.
Robust revenue trends are keeping corporate bond default rates low. Analysts expect high-yield default rates on corporate debt of 0.75% this year and 1.25% in 2023. This is well below the long-run average in excess of 3%. The low default rate resembles the 2010-2013 and 2004-2007 time periods, both of which enjoyed bull stock markets.
The above bullish news is met with historic bearish sentiment. It was reported last week that the American Association of Individual Investors sentiment survey showed a bullish reading of just 15.8%, which was the lowest since 1992. Markets tend to make their biggest moves when investors are surprised with positive or negative news.” Any positive news would fly in the face of this pessimism and unleash a potentially positive knee-jerk response.
Another common debate in markets these days is whether the shift in commodities will be long-lasting – e.g. the start of a commodity “super-cycle”. The chart below sketches out the relative performance of commodities and stocks. The red lines highlight periods when commodities outperformed stocks. These were also periods when stocks were generally flat-to-negative. They are long, multi-year cycles. Are we at the beginning of a new cycle? The last cycle was driven by the vast infrastructure buildout of China which saw emerging markets flourish. What would fuel a new cycle?
Stock investors endured another week of heightened volatility with earnings season hitting full stride in the face of continued concern about the pace of Fed interest rate hikes. Monday saw rates rising with stocks flat as earnings from Bank of America (BAC) provided some encouragement. A federal judge’s ruling that masks are no longer required on airlines sent travel stocks soaring Tuesday. Strong earnings from consumer healthcare leader Johnson & Johnson (JNJ) further bolstered investors. Stock indexes closed higher by +1.5%. Positive earnings reports from Procter & Gamble (PG) and IBM added to the bullish tone. However, the Nasdaq was rocked by former star Netflix’s sour report. The streaming giant reported a decline in subscribership as consumers are now awash in choice from media streaming services. The Netflix (NFLX) news sent the stock down -35% and the Nasdaq down -1.2% Wednesday. Strong results from market darling Tesla (TSLA) pushed stocks higher in early trading Thursday. But Fed Chair Powell’s comments that the central bank is prepared to raise interest rates another 0.5% in their May meeting seemed to take the life out of the market. Stocks reversed their morning gains to close down by -1.5%. The negativity continued Friday with stocks enduring further steep losses. Disappointing earnings from hospital manager HCA slammed healthcare stocks, usually a place of safety during market storms. Another safe place, consumer staples, held up, however, as Kimberly-Clark (KMB) delivered solid earnings. Airlines posted strong results throughout the week noting substantial demand. They were a rare bright spot Friday. But the broad market pull downward was too much as stocks overall slid more than -2.5% to give back the entirety of their late March rally.
Earnings have substantially outperformed expectations so far. But it hasn’t been enough to overcome severe investor angst about Fed interest rate policy. This week, the Fed-driven market suffered a serious setback with stocks returning near their lows for the correction. For the week the S&P 500 (SPY) slumped -2.68%. The Nasdaq 100 (QQQ) cratered -3.85%. Smallcap stocks (IWM) fell -3.16%.
Warm wishes and until next week.