by Bryan Perry

April 25, 2023

In the first three weeks of April, the S&P 500 stayed within a 100-point range, mostly staying within a tight 4,100-4,150 channel, but we could see a breakout in the next two weeks. The number of conflicting data points, adjustments in earnings guidance, and Fed rhetoric has only become more elevated, giving rise to the notion that the market has to break one way or the other. This past week saw the mighty tech market trade with a notably cautious tone, as pre-earnings estimates were lowered on several leading tech titans. At the same time, the market might reward all the cost cutting and belt-tightening within the tech sector when they report their numbers. It’s hard to say now, but investors will know soon enough.

Then there’s the debate over inflation, which doesn’t look to be settled anytime soon, at least not after last Friday’s PMI reports, which came in hotter than forecast. The Flash Purchasing Managers’ Index (PMI) from S&P Global was surprisingly strong. The services sector posted a 12-month high of 53.7, well above the 51.5 expected, and last month’s 52.6 reading. The manufacturing sector, mired in a multi-month contraction, rebounded sharply, reaching 50.4, a five-month high. The 50.4 level was well above forecasts of 49.0 and was higher than last month’s 49.2, bringing more confusion just after Thursday’s release of the initial and continuing unemployment claims showing a continued slowing in the labor market.

Before the Fed meets again next week, they will have the benefit of hearing from the “nifty 50” S&P 500 companies that matter most to market sentiment, while receiving key economic reports – including the S&P Case-Shiller Home Price Index, Consumer Confidence, Durable Orders, Unemployment Claims, Employment Cost Index, Chicago PMI, and the Fed’s favorite inflation indicator, Personal Consumption Expenditures (PCE) index. Collectively, these data points are very important, but last week’s PMI reports pretty much locked in a 10th consecutive rate hike, while raising the probability of another hike in June.

Percent Change in Inflation Tables

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

Good news from the strong PMI readings seemingly triggered a shift in the narrative back to “sticky’ inflation, higher rates for longer, a stable dollar, lower oil prices, lower gold prices, and more pressure on the consumer. Hence, the sloppy and choppy price action for much of the market for the past week. But if market participants are truly worried about a potential leg lower for stocks in the coming days, then why is the CBOE Volatility Index (VIX) trading at a new 52-week low? That seems awfully complacent.

CBOE Volatility Index Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

Sometimes it’s OK to admit that one just doesn’t know. Soft landing, hard landing, crash landing, or just no landing? I think the prospect of an earnings trough in the current quarter is a valid one, as the economy is learning to live with the price increases it has to absorb, especially with the tight housing market.

Standard and Poor's 500 Net Profit Margin Bar Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

According to FactSet, analysts are looking for a second half rebound in profit margins, which makes sense. Coming out of the Great Recession (2008), companies posted record profits on lower sales growth due to broad cost cutting measures and the implementation of more efficient processes. This time around will be different. Inflation is forcing radical changes in workforce procedures, cost of goods management, and whatever measures that can drive enhanced productivity. The resultant effect is the creation of leaner and meaner corporations, where earnings growth will recover after the Fed pauses and the 10+ rate hikes work through the system. But for now, when someone asks where the market (or inflation) is headed, or are we headed into a recession, it’s perfectly OK to answer, “Ask me in two weeks. I’ll tell you then.”

All content above represents the opinion of Bryan Perry of Navellier & Associates, Inc.

Please see important disclosures below.

Also In This Issue

Global Mail by Ivan Martchev
The Stock Market Has Reached a Fork in the Road

Sector Spotlight by Jason Bodner
Opinions are Cheap – Accurate Data Is Priceless

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Read Past Issues Here

About The Author

Bryan Perry

Bryan Perry
SENIOR DIRECTOR

Bryan Perry is a Senior Director with Navellier Private Client Group, advising and facilitating high net worth investors in the pursuit of their financial goals.

Bryan’s financial services career spanning the past three decades includes over 20 years of wealth management experience with Wall Street firms that include Bear Stearns, Lehman Brothers and Paine Webber, working with both retail and institutional clients. Bryan earned a B.A. in Political Science from Virginia Polytechnic Institute & State University and currently holds a Series 65 license. All content of “Income Mail” represents the opinion of Bryan Perry

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