Market Update
The stock and bond markets in the U.S. are closed for trading today for Good Friday ahead of Easter weekend. The markets are very moody so it is as good a time as any to take a personal day. Talk about a recession is getting heated, though most place the likelihood at no more than 30%. Even while the pandemic seems to be over (for now) and employment is very strong, the pessimism and certainty that we are headed for an economic crash is on the minds of many.
The Gallup poll that asks consumers about their confidence in the future recorded responses that were gloomier than at the beginning of the pandemic. Two years ago we were definitely in a recession and unemployment was officially near 15%, but probably higher. Now our economy is growing, if slowly, and unemployment is 3.6%. Yet, people do not feel very confident about the future, down sharply from last year.
Blame inflation. Costs for energy and food are eye watering. In March alone gasoline spending rose nearly 9%, even though we are still driving less than before the pandemic. Food prices have been rising for the last two years and are expected to lift another 3-4% in 2022. That might be underestimating the impact of losing production from Ukraine’s massive agriculture contribution and wrinkles like bird flu, currently in 23 states, which will impact poultry prices by 9-12%.
We can blame Russia for invading Ukraine. The loss of supply of Russia’s oil and precious metals is well understood at this point but the strain from the loss of wheat and fertilizer from the region, particularly Ukraine, has not been actualized yet. Ukrainian farmers who should be tending their land right now are at war instead.
Covid-19 can always pick up some of the blame, as it is spreading in China, where the government is struggling mightily with the zero-Covid strategy. Shanghai, a city of some 26 million people, has been mostly shuttered since March 28th to comply with the health policy. Shenzhen, a technology center and Changchun, the largest car manufacturing region, are also locked down. Economists at Nomura worry that lockdowns there will disrupt China's spring planting and lead to further strain on global food prices, not to mention the wrench this has thrown into the movement of goods and supplies, once again.
As a result, stocks have been indecisive, wavering back and forth all week. Oil moved mostly higher, ending at $106 per barrel, down about $23 a barrel from recent highs, but bucking longtime trends that usually see it fall as warmer weather comes. Gold was also higher, sticking within 5% of its recent high of $2,082 per troy ounce. Bonds, which have had a really tough year, rallied a bit, pushing prices higher and yields lower, as investors tried to guess at the Federal Reserve's strategy after the inflation report. Excluding volatile food and energy prices, core inflation "only" rose 0.3%, thus the Federal Reserve might not have to raise short-term interest rates as high, meaning bonds seem more appealing at their current levels. And in fact, shoppers may already be deliberately paring back spending. Data collected by the Federal Reserve Bank of Chicago suggests retail spending fell nearly 3% drop in March when car sales were excluded. Yet, one month does not make a trend.
Focus on Margins
It’s that time again when publicly traded companies announce earnings for the quarter ending March 31st. It is a long “season”, with lots of hype, lengthy calls with industry leaders and many pundits thumbing through reports to find Easter eggs - the inside scoop, not plastic ovals filed with candy.
Raw earnings are always important but this time the focus will be on the margins – basically the difference between revenues and expenses. How a company has managed its expenses may never have been more important than now. Outside of the energy companies, most every business is dealing with rising fuel costs alongside higher employee and materials expenses. As it happened, through the first week of the month, the two dozen S&P 500 companies that reported highlighted labor costs and ongoing supply and demand imbalances as their biggest challenges. It seems certain that margins will decline from last year.
Of course earnings will dominate the conversation as it's an easy metric to compare and is widely understood. Data analytics company FactSet predicts that overall first quarter earnings will rise 4.7% for the S&P 500 companies collectively. It is not so exciting when compared to last year’s stimulus-fueled 52.5% rise, but not terrible considering all of the headwinds - again, those are war, inflation and the spread of Covid-19 in China.
Even in the space of all of their pessimism (see Gallup chart above), Americans are determined to spend money in very certain ways, like on vacations, visiting with friends at restaurants and buying new cars. Just ask the Delta CEO Ed Bastian how he feels about travel today and he is positively giddy. On CNBC this week he said, "The demand is phenomenal. We've never seen, in our company's history, the level of demand for our products and services. In the month of March, we had our highest sales in terms of bookings in any month of our history. Period." Expect enthusiastic comments from other CEOs in similar industries.
Goldman Sachs might be among the most pessimistic of major analysts and warn investors that there will be negative earnings surprises coming. Their concerns are particular to companies exposed to Europe given the negative spillovers from Russian’s invasion. Consumer discretionary companies are also at higher risk of disappointing shareholders. Goldman is generally more supportive of companies that are buying back their own stock, which provides a support, or paying a dividend, which we strongly advocate for as it provides some investor shelter from the economic elements.
But, on the big "R" word, Goldman is not anticipating an economic recession. Additionally they see earnings rising more the second half of the year. Their analysts expect growth of 6% in Q2, 10% in Q3 and 13% in Q4.
Trifecta
It is rare when the major religious holidays of Judaism, Christianity, and Islam occur at the same time as they do this year. The Jewish Passover starts this evening, Christians observe Good Friday ahead of Easter Sunday today and Muslims are in the midst of Ramadan, which started April 2nd and will end May 2nd. Both Jews and Christians celebrate new life and Muslims focus on spiritual introspection.
Lunar and solar calendars dictate the timing of the dates and while Good Friday usually follows Passover, Ramadan only intersects every 33 years. These next few days over 50% of the world’s population, pegged at 7.7 billion, will be observing traditions that go back hundreds to thousands of years.
From us to you, no matter how or if you observe these holidays, we wish you peace!
Comments