by Jason Bodner
May 9, 2023
Worth is entirely subjective. One example is back when tulips were worth more than gold. In the 1630s, tulips were only for the very wealthy. The famed tulip speculative bubble vaulted the Rembrandt-bulb to the equivalent of $1,500, 10 times the annual income of a skilled craftsman or the price of a large house.
Currently, the stock market’s value seems most often correlated to one man’s words: Jerome Powell.
Well, last Wednesday, Mr. Powell spoke again. Market volatility followed, attributed to his “hawkish” comments, but I don’t agree. I found positivity in Powell’s statements. I see most of the market’s volatility related to earnings, along with some seasonality, and both make me bullish for the back half of the year.
Investors wonder if the Fed is done raising rates… Are we headed for recession? What will stocks do?
There’s still a ton of negativity out there. The media continues to haul out fearful headlines, like:
- Nuclear threats in the Russia/Ukraine war.
- A coming recession
- Economic stress
- Banking collapses
There’s plenty to fear – always. Some worry that when the Fed reverses course, it could sink stocks. I have data that says the opposite. In fact, the average three- and six-month return of the S&P 500 after the final rate hike in a tightening cycle is positive, on average, and for the last five cycles in a row:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Unfortunately, our minds are hard-wired to focus on the negative. This survival instinct served us well throughout our species’ development, but as investors, I think we should rather focus on data.
I listened to the FOMC statement and subsequent press conference. Here are my takeaways:
- Powell began his statement by saying that the banking system is sound and resilient. (Ironically, later that same day PacWest (PACW) dropped 50% after hours after reporting horrific earnings.)
- After restating a rate increase of 25 basis points to 5.00-5.25%, he reiterated the Fed’s mandate of maximum employment, price stability, and the Fed’s long-term goal of 2% inflation.
- He said tighter credit conditions would further slow the economy.
- The Fed continues to reduce securities holdings – lightening the balance sheet.
- Most importantly, he had a change of tone: We will be data dependent to determine if further tightening policy is necessary. In fed-speak, I interpret that to mean, “We are done tightening.”
- Powell sees policy tightening has effects on demand (housing and investment).
- He said the economy has slowed significantly: Growth is modest, and housing is weakening, largely due to higher mortgage rates. Higher interest rates are hampering economic growth.
- The labor market is still hot. There are some signs that supply and demand in labor are coming back into balance, but demand still outstrips supply.
- The banking sector is causing tightening credit conditions, which will further slow the economy.
In my view, this means that with higher rates, reducing the balance sheet (reducing liquidity), and tighter credit conditions (harder borrowing), the war against inflation is working. This means that future policy action is based on what data comes in. In fact, he said, “We will go meeting by meeting.”
This contributes to why I am bullish for the back half of the year….
First, we see inflation falling hard. We see inflation (as measured by the CPI) and the Fed funds effective rate almost at parity for the first time since prior to COVID. Notice also that when rates rise above inflation, recent history suggests they fall thereafter. This sets up for upside for stocks:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Also, the Earnings Apocalypse forecasted by the media, simply hasn’t come true. In fact, it’s the opposite. According to FactSet, as of May 7, for Q1 2023 (with 85% of S&P 500 companies reporting results), 79% of S&P 500 companies beat earnings estimates and 75% beat revenue estimates. That’s fantastic.
There is one problem: Guidance. Many companies are issuing cautious guidance or lowering it altogether. We see the effect of lower guidance on great companies. For instance, several stocks beat sales and earnings estimates, but traded down on weaker guidance. For example, REGN, a phenomenal healthcare company, has beaten earnings estimates 16 straight quarters and sales estimates 14 of the last 16 quarters.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
That’s amazing.
If I ran a public company, I would issue conservative guidance. I’d rather under-promise and over-deliver. I imagine many companies are now conservative about guidance, creating an uncertain economic landscape. Imagine, then, if companies continue beating earnings in Q3 and Q4: This sets up an upside.
Also, there’s loads of cash on the sidelines. In fact, it’s the highest amount on record, ever:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Should rates cool, inflation abate, and earnings continue to surprise positively, the market will naturally strengthen. Then, as investors fear missing out – that record cash will begin to chase a hot equity market.
Before we get ahead of ourselves, we need to be aware of seasonality. We’ve all heard sell in May and go away. There is truth here. Look at the monthly returns of the S&P 500 since January of 1990:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
June through September look weak. This means we should enjoy our summer. As for stocks, summer is great for outperforming stocks to reveal themselves. They say: rising tides lift all boats. That’s true, but falling tides reveal what’s underwater. It could be smelly fish, or hidden treasure.
In summary:
- The Fed is pretty much done raising rates. When answering a Barron’s reporter’s question, Powell said that: Support for a 25 bp increase was strong across board. There was talk of pausing but not at this meeting. But there is a sense of being much closer to the end than the beginning – We’re getting close or are even already there.
- Inflation is falling and at parity for the first time since pre-COVID, which sets up for lower rates in the future.
- Earnings are working, with cautious guidance that could set up for upside in the event of continued surprises.
- There’s record cash waiting for deployment.
- And lastly, while seasonality looks ho-hum for the summer, look again at the last months of the year. Q4 is historically very strong.
Keep this in mind while trying to enjoy your summer: Data can give us a way to solve the markets.
While Churchill was talking about Russia when he said this famous quote, the same could be said for stocks:“Russia is a riddle wrapped in a mystery inside an enigma.”
Navellier & Associates Inc. does not own PacWest Bancorp (PACW), or Regeneron Pharmaceuticals (REGN) in managed accounts. Jason Bodner does not own PacWest Bancorp (PACW), or Regeneron Pharmaceuticals (REGN) personally.
All content above represents the opinion of Jason Bodner of Navellier & Associates, Inc.
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A Look Ahead by Louis Navellier
Employment Reports & ISM Numbers Reflect a Growing Economy
Income Mail by Bryan Perry
Some Beaten Down REIT Subsectors Deserve a Closer Look
Growth Mail by Gary Alexander
When Gresham’s Law Meets a Debt Ceiling, Gold Can Soar
Global Mail by Ivan Martchev
If Bank Stocks Can Rally, the Market Can Rally Some More
Sector Spotlight by Jason Bodner
Some Takeaways from Chairman Powell’s Mid-Week Musings
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Jason Bodner
MARKETMAIL EDITOR FOR SECTOR SPOTLIGHT
Jason Bodner writes Sector Spotlight in the weekly Marketmail publication and has authored several white papers for the company. He is also Co-Founder of Macro Analytics for Professionals which produces proprietary equity accumulation/distribution research for its clients. Previously, Mr. Bodner served as Director of European Equity Derivatives for Cantor Fitzgerald Europe in London, then moved to the role of Head of Equity Derivatives North America for the same company in New York. He also served as S.V.P. Equity Derivatives for Jefferies, LLC. He received a B.S. in business administration in 1996, with honors, from Skidmore College as a member of the Periclean Honors Society. All content of “Sector Spotlight” represents the opinion of Jason Bodner
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