Weekly Update

The Market Sans Energy Is Not So Pretty

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Published August 26, 2022


With summer winding down, we await the post-Labor Day return of a fuller market trading pattern to provide better clues of investor thinking. In the meantime, the summary below from Delta offers a good overview of the current economic data.

“We have had a couple of back-to-back quarters of negative real GDP growth. This is typically the layman’s definition of recession. Many market strategists and economists have said we are not in recession because corporate earnings are growing.

With 90% of the S&P 500 companies having reported second quarter earnings, the overall earnings growth rate of the S&P 500 is 6.7%. On the surface, this does appear to be a positive.

It turns out that when we remove the very positive year-over-year earnings growth of the energy sector (up 299%), the rest of the S&P 500 had a year-over-year decline in earnings of -3.7%. Negative earnings growth of the S&P 500 ex-energy reinforces the argument that the economy is currently in a recession.

A strong labor market is often cited as evidence the economy is expanding and inflationary pressures remain strong. When we look at current employment statistics from online job listings, we see job openings have declined by about 40% in recent months. The Goldman Sachs index of hiring expectations has moderated sharply since March.

Hiring expectations have moderated sharply

Employment is a lagging indicator for recessions. A recent survey of business executives by Price Waterhouse Coopers (PwC) indicated that 47% of companies are considering or plan to reduce their company’s overall headcount. Typical of recessionary times, we often see the labor market begin to contract when the recession has already begun.

Anemic earnings and a slowing labor market suggest inflation will decline sooner and by more than currently expected. If this proves to be the case, the Fed should raise rates less than expected which is supportive of higher P/E multiples and less of a dampener on economic growth. Bad news now is good news for the stock market.”


Market Update

The focus this week was on Fed Chair Powell’s Friday speech. Investors have been trying to assess whether recent reports of reduced inflation are enough to dampen the Fed’s tough inflation-fighting stance. After a solid rally over the past few weeks as inflation fears diminished, stocks have started to backtrack a bit with investors becoming cautious ahead of the Friday speech. Monday’s -2.1% drop added a second day of declines in evidence of the newfound caution. Stocks treaded water Tuesday and Wednesday with a rise in oil prices giving a fresh boost to energy shares. Opec+ leaders suggested a possible cut in output as demand struggles with the global economic slowdown. Stocks surprised some Thursday with a +1.4% boost coming as investors seemed to take a more bullish economic view in light of a Q2 GDP revision that lowered the economy’s downtick in the quarter. Also, China announced a series of economic actions designed to lift their economy. But all those hopes for a softer Fed stance were dashed early in the trading day Friday. Fed Chair Powell reiterated the central bank’s intention to stop inflation in its tracks through holding interest rates at a higher level long enough to bring inflation to heel. Those comments unnerved investors who had been betting on an early-2023 dip in rates. Stocks fell throughout the trading session to a -3.4% loss. The yield curve inverted a bit more while all 30 of the Dow Industrial stocks ended up in the red.

Stocks returned to their bear market ways this week with the S&P 500 sliding -3.99% and giving up the entirety of its August gain in Friday’s washout. The growth-stocks in the Nasdaq 100 (QQQ) came under heavier pressure losing -4.78%. Smallcaps lost -2.91% aided a bit by gains in the energy sector.

Warm wishes and until next week.