Market Strategy 5/02/2022
Too Late to “Sell in May and Go Away?”
Opportunities exist for long-term investors as major markets enter correction territory
Key Takeaways
- With 275 or 55% of the firms in the S&P 500 having reported, Q1 earnings are up 2.7% from a year ago on revenue growth of 12.8%. Thus far in the season, 81% of firms have posted positive surprises.
- Midst the market turmoil of the last few weeks, Warren Buffett has been on a stock buying spree.
- This week we show how inflation’s surge is a global phenomenon, even though among developed nations the Netherlands is the only country posting an inflation rate higher than that of the US.
- We’ve updated our “Maximum S&P 500 Drawdowns” table to show the broad market’s current decline of 13.3% through April 29, which exceeded its previous max decline of 13.05% on March 9.
- Major US indexes (S&P 500, S&P 400, Russell 2000) have seen a “correction,” whereas the Nasdaq Composite is in a bear market decline
Q1 earnings, a brace of key economic data including jobs and wages on Friday—with the Federal Reserve’s FOMC meeting interest rate decision on Wednesday are likely to keep traders and investors on their toes this week.
Transitions are never easy but the journey from the COVID-19 pandemic to “whatever comes next” aggravated by: a serious fiscal stimulus hangover, an extended spiking of commodity prices worsened by Russia’s attack on Ukraine and a global dysfunctional supply chain made worse by “0” (zero) tolerance to outbreaks of COVID-19 in China have created a perfect storm and a wicked catalyst for bears near term to sell without FOMO (fear of missing out).
Some of last week’s action in the stock market reminded us of parallel sentiment and pullbacks in the recovery process from the Great Financial Crisis that took place in 2009. Work-out markets from crisis are never easy with negative and positive outcomes from actions taken along the way obfuscating what progress has been made and roiling investment sentiment along with stock and bond prices. Two steps forward three backward is not uncommon as markets “navigate their way out of the woods” looking to find toe holds to climb a wall of worry.
Q1 earnings season has seen a large number of companies positively surprise (some 81% of companies reported have beat analyst estimates) and expectations for the quarter thus far continue to improve. That said, earnings results are seeing a mixed reception to solid reports on concerns expressed by managements in reporting related to potential outcomes of uncertainties tied to supply chain disruptions, labor shortages, commodity prices, rising wages and the challenges wrought broadly by the highest levels of inflation in four decades. Results from key sectors for the market including information technology, financials and consumer discretionary have been mixed.
Earning Season Rolling On…
Stocks last week bounced between gains and losses as data and earnings results crossed the proverbial transom. As of the end of last week the Dow Jones Industrial Average, the S&P 500, the S&P 400 (midcaps), the S&P 600 (small-caps), the Russell 2000 (smallcaps) and the NASDAQ Composite (some 40% weighted in technology or tech-related stocks) were respectively off from the start of the year: 9.25%, 13.31%, 12.02%, 13.34%, 16.98% and 21.16%.
The major foreign equity indices included in MSCI EAFE (developed international markets ex-US and Canada), MSCI Emerging Markets, MSCI Frontier Markets and MSCI World were respectively off year to date: 12.94%, 12.65%, 11.44% and 13.4%.
With a little over 55% (275) of the member companies in the S&P 500 having reported thus far results from the balance of companies which have yet to report will be closely followed and parsed by the market participants this week and in the weeks that remain for this earnings season.
As of the end of last week the dollar stood up 6.09% versus the Bloomberg Dollar Index (a basket of leading developed and emerging market currencies) partly on the back of the Fed’s having begun to raise rates with prospects to move higher making US assets more attractive to foreign investors. The dollar’s current strength also reflects its role as a safe haven currency in times of global trouble and uncertainty.
Beyond the downside drama in the stock market last week it’s worth pointing out that noted investor Warren Buffet has been of late on what Bloomberg news described as “his biggest stock buying spree for at least a decade, undeterred by the geopolitical turmoil and fear of runaway inflation.”
Midst the S&P 500 Index’s worst quarter in two years the Oracle of Omaha as he has been known to be called made $41 billion in net stock purchases in the first quarter. According to Bloomberg that’s the most for Buffet since 2008—when in another scary quarter where others feared to tread, the legendary investor stepped up to the plate to invest.
As we approach the start to the new week stateside we’ll recall the market recovery year of 2009 wherein the year opened with a sizeable drop of over 25% for the S&P 500 followed by an over 60% rally from a horrible low in March through the end of that year. It’s worth noting that for the year, start to finish, the S&P 500 was up over 23%. Past performance is no guarantee of future results of course, but uncertainties and day to day disasters have been known to be capable of being handily offset over the course of history.
Experience old and new can provide comfort
The longer one survives the process of volatility sourced in financial, health and geopolitical related issues as well as the day to day of whatever rattles, conjures, and drives the markets—the more one comes to realize that challenging times provide valuable experience from which to profit from ideas and innovation that come from meeting whatever are the challenges at hand.
For all that inspires words like “tanked”, “plunged” and “sank” history tells us that human beings, including government, educational, military and business people are more often than not capable of facing and overcoming extreme challenges. Consider recent challenges that daunted and darkened the outlook in 2008 and 2020 and that ultimately proved that indeed for yet another time the darkest moment comes before the dawn.
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