Asset Management
05/08/2023 Market Strategy
May 08, 2023
The Long and Winding Road
Getting to the next new normal is proving to be neither a quick nor a straightforward journey
Key Takeaways
- With 425 or 85% of the firms in the S&P 500 index having reported first quarter earnings, those firms have reported profits 3.3% lower than a year ago despite revenue growth of 4.3%. Another 31 firms are scheduled to report this week as the season winds to a close.
- Among the 11 sectors of the S&P 500, five are showing earnings growth while six are seeing declines. Three sectors are showing double-digit earnings growth including consumer discretionary, industrials, and energy
- We remain highly constructive on equities as the economy continues to show signs of slowing while not falling off the proverbial cliff.
- In the week ahead markets will focus on widely held and followed companies in the S&P 500 still to report results as well as on economic data that includes both consumer and producer price indexes.
The proverbial road out of the pandemic hasn’t been easy for central bankers, regulators, business people, or consumers. The bad news is we’re not “out of the woods” yet as challenges appear to emerge almost in serial fashion. Whether it’s things like stickier than expected inflation, supply chain disruptions not quite resolved, the recent crisis of confidence amidst the regional banks or the dysfunction that remains as to when and how the national debt ceiling will be resolved, the next new normal for the economy, the markets, Wall Street and Main
Street seems to remain at best just out of reach. Notwithstanding the frustration that comes with serial challenges to a recovery process for the US and the world economy some things actually do appear to be getting better.
Stateside it would seem the Federal Reserve after ten rate hikes (with a move at each and every meeting since March 2022 and with the most recent announced just last week) has had some success in stemming the tide of inflation, bringing its growth measured by the CPI down from 40-year highs of 9.1% last June to 5.0% nine months later. This week’s report for April CPI should provide further indication of how fast prices are rising and perhaps whether the Fed can pause its hikes at the June 14 meeting.
The strength in the labor market and the resilience in wage growth in data reported last Friday suggests to us that the Fed’s efforts have yet to push the economy as close to a recession as many have worried.
While inflation has proved to be stickier than the Federal Reserve and others had expected the reduction in the rate of inflation that has thus far occurred has yet to induce a recession. Economic growth while slowing has not yet confirmed the arrival of a recession even as the Federal Reserve has had to raise rates fairly aggressively in an effort to bring an end to an era of “free money.” (A period of historically low interest rates exacerbated by the largesse of fiscal policy in response to the pandemic).
In our view the Fed since pivoting to its accommodative stance in the fourth quarter of 2021 has remained sensitive to the effects of its tightening regime to avoid slamming on the brakes on economic growth. After completing tapering its monthly bond buying program in Q1 2022 it began to raise its benchmark rate in March of 2022 with a 25 basis point rate hike followed by successive hikes at FOMC meetings that followed with respectively 50, 75, 75, 75, 75, 50, 25, 25bps hikes along with the latest last week of another 25bps. The effect on rates of course has been quite dramatic taking the Fed’s benchmark rate from a range of 0–0.25% before the March 2022 initial move to 5–5.25% as of last week.
As dramatic as the rate hike sequence has been in a period of 13 and a half months, addressing the drama and the high risk situations caused by a period of “free money” seemed an imperative. Historically low interest rates contributed at least some part in generating pocket bubbles across asset classes including those in real estate, crypto currencies and long duration growth stocks as well as contributed to what may have been lapses in oversight by some regulators and due diligence practices by some operators in the regional bank space.
All of which suggest to us that the Fed’s actions in raising rates since March of 2022 would thus far seem to have been the right course of action.
Looking ahead we would expect that any slowing in activity in the regional banking sector (as regulators address policies and practices that may have become too lenient to prevent the outcome that recently jostled markets) will provide a silver lining for investors with the potential for regulatory efforts to trim growth enough to allow the Fed to stay light on the monetary “brake pedal” going forward even as it may need to continue to raise rates for longer than many would like in order to push inflation toward its target level.
The strength in the labor market and the resilience in wage growth in data reported last Friday suggests to us that the Fed’s efforts have yet to push the economy as close to a recession as many have worried.
We remain highly constructive on equities as the economy continues to show signs of slowing while not falling off the proverbial cliff. Q1 S&P 500 earnings season has shown the ability of many companies to navigate challenging waters of the significant transition taking place stateside and around the world in moving from post pandemic to what we expect will be a “next new normal” replete with a rate of sustainable economic growth if at a moderate pace.
This week be sure to peruse the pages that follow with details on Q1 S&P500 earnings season, sector and style performance, the comparative returns of major market indices stateside and abroad along with commentary on economic data and forward valuations across the S&P 500 sectors as well as major regional indices and much more.
In the week ahead markets will focus on widely held and followed companies in the S&P 500 that remain to report results this earnings season as well as on economic data that includes both consumer and producer price indexes.
For now and until some resolution is reached addressing the debt ceiling will be high on the minds of business and consumers from Main Street to Wall Street.
Name:
John Stoltzfus
Title:Chief Investment Strategist, Oppenheimer Asset Management Inc.
John is one of the most popular faces around Oppenheimer: our clients have come to rely on his market recaps for timely analysis and a confident viewpoint on the road forward. He frequently lends his expertise to CNBC, Bloomberg, Fox Business, and other notable networks.
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