4 rate hikes became 7 rate hikes became 11 rate hikes…quickly
Richard Barrett, Chief Investment Officer | April 7, 2022
Markets haven’t experienced higher inflation and higher yields in a really long time, but that’s the world we find ourselves in right now.
The Fed and the Market seemed to be on the same page leading up to last December. Both saw rising/persistent inflation, and both agreed on the need for higher rates. Back in December, the front end of the yield curve (shorter dated maturities) was pricing in 4 rate hikes for 2022. The Market and the Fed were in agreement on that then. All that quickly changed when inflation accelerated higher AND the Fed kept doing quantitative easing (money printing/bond buying/bigger Fed balance sheet) thru March. Inflation everywhere and a shortage of labor does not need monetary stimulus. Fire does not need fuel. The Market has sent the Fed a direct message that the Fed “didn’t get it” and sent short rates markedly higher.
The Fed usually controls the front end of the yield curve. The Market has complete control over it right now. The Market is telling the Fed that they are behind in fighting inflation and that short rates need to go up a lot. The Market is daring the Fed to go faster and do a series of +50bp rate hikes. Back in December four rate hikes were priced in; today the Market is pricing in almost 11 +25bp hikes for FY2022.
What are the implications? Higher rates will slow the economy. An inverted yield curve (short rates > longer rates) will cause a recession about 18 months after such persistently occurs. Right now, we are not inverted – mainly due to 10y UST rates rising faster than 2y UST rates. WATCH THE SHAPE OF THE YIELD CURVE. If we get a late 2023 recession, it’s because the Fed went too fast too late and caused such to happen during 2022.
Long rates need to be > short rates. It’s all about rates and always will be. The cost and availability of money and credit drives the economy, investment, and ultimately corporate earnings growth. And earnings drive the direction of the equity market.
Source: Bianco Research April 6, 2022
Lowest AAII Bull/Bear readings in 30 years..and why that is a good thing
Richard Barrett, Chief Investment Officer | April 19, 2022
Last week’s AAII Bull/Bear reading of just 15.8 was the LOWEST reading since 1992. Bears greatly outnumber Bulls. A lower reading than the darkest days of 2008-2009. Lower than when we got hit by COVID in March 2020. You can’t find a bull these days with a flashlight and a compass. Be bullish when others are bearish. Forward market returns from extreme weak sentiment readings have historically been well ABOVE average.
Bull markets are conceived in fear, born in despair, grow in skepticism, and die in euphoria. These readings are far from euphoric. Stay long staying long.
Source: AAII, JonesTrading LLC
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1Q Earnings Update
Sauro Locatelli CFA®, FRMTM, SCRTM Director of Quantitative Research | April 28, 2022
We are entering the busiest days of 1Q reporting season for companies in the S&P 500 index. While only 212 companies have reported results over the last couple of weeks, another 228 will report before the end of next week, reaching a total of 88% of the S&P 500 index’s market capitalization. By that point, even though reporting season won’t officially close until early June, les jeux sont faits.
While it is still early at this stage to draw any conclusions, results released so far have been encouraging. Of the 212 companies that have already reported, 83% delivered a positive earnings surprise (i.e. earnings were above analysts’ estimates), which is above the 5-year average of 77%. On aggregate, even including companies that delivered a negative earnings surprise, earnings are coming in roughly 6% higher than analysts expected. However, as is usually the case, investors tend to discount past results and pay more attention to company guidance concerning expected future earnings, which are then incorporated into forward-looking analysts’ estimates. While a few companies made headlines for slashing their earnings outlook for future quarters, net guidance so far has been positive, and aggregate earnings estimates have continued to grind higher. In fact, forward-12-month earnings estimates have risen from below $220/share at the beginning of the year to over $228/share as of today. This has resulted in an interesting divergence, where earnings estimates have been rising at the same time as the S&P 500 index has been falling and is currently revisiting its lowest level for the year.
As we have pointed out in the past, stock prices can be volatile in the short term but tend to follow the directions of earnings in the long term. Current analysts’ estimates point to earnings growth to continue at a solid pace even beyond this year, reaching a level of over $250/share by next year. These numbers should be quite achievable barring an impending economic downturn, the odds of which remain quite low at the moment. As such, the widening disconnect between earnings and prices should be viewed as an opportunity to own stocks at a more attractive valuation.
Source: Congress Wealth Management, Bloomberg, as of 4/27/2022
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