10/23/2023 Market Strategy
Going Through Them Changes
Since the end of July markets have brought a feeling of “nowhere to run, nowhere to hide”
Key Takeaways
- With 86 or 17% of the firms in the S&P 500 index having reported third-quarter results so far, the data show earnings up 2.2% from a year ago on back of revenue gains of 5.8%. This week another 169 firms are scheduled to report, with 159 the week following.
- Markets will have a full spate of economic data to parse and digest this week as well.
- The 10-Year Treasury yield last week skirted the 5% level on Fed Chair Powell’s comments, which raised concerns within the markets that the Fed could keep rates higher for longer.
- Last week’s retail sales figures for September showed surprising strength, with results for the prior two months of the quarter also revised higher. The sales data suggest a sharp increase in consumption demand is likely in Q3 GDP figures to be reported later this month.
This week traders and investors will have a hefty tranche of economic data and Q3 corporate earnings to parse and digest. Among the key economic data points scheduled for release this week are a number that could provide clues of where the economy and the markets are likely headed over the course of the fourth quarter of this year.
Among the key economic gauges scheduled for release this week are regional Federal Reserve bank reports on manufacturing and services activity from across the country, purchasing manager manufacturing and services indices from S&P, housing, employment, GDP, personal income personal spending and consumer sentiment from a number of government agencies and other data sources.
Geopolitical risk remains elevated in the Middle East, Ukraine and in Asia with the recent attack on Israel by Hamas terrorists and the increase in hostilities that has followed at the epicenter of global risk and uncertainty.
Earnings Season Gathers Momentum This Week
Stateside Q3 S&P 500 earnings season continues this week as 169 companies report results including major components of the information technology sector and the communications services sector (some 60% in technology or tech-related companies), along with widely followed names in the consumer discretionary sector (two of the “big three” US auto makers) and the energy sector (the two biggest US integrated oil companies).
Market participants will be listening closely to these earnings calls particularly for any guidance from managements as to their assessment of current conditions and what may lie ahead.
Thus far this earnings season positive surprises have offset disappointment though traders have been stingy in rewarding good performance even sending some stocks lower after reporting solid results. We find such activity less worrisome than one might think as such behavior has been a hallmark of post-reporting action for some time (considered often by observers and market participants as a “buy the rumor, sell the fact” reaction by traders).
With only 86 or 17% of the firms in the S&P 500 index having reported third-quarter earnings so far, it’s too early to tell the outcome yet. That said, the bottoms-up consensus estimate for Q3 earnings (as reported by The Wall Street Journal) is for just a 0.5% YoY decline. That would be an improvement from the prior two quarters’ year-on-year growth results. It’s important to remember that results last year (2022) were boosted by the post-pandemic rebound demand, meaning that earnings this year (2023) face “tough comps” (comparison with the prior year).
The 86 companies that have reported Q3 results thus far have shown earnings growth up 2.2% on back of revenue gains of 5.8%. With nearly half the companies in the financial sector having reported their profits are up 4.5% on the back of a 7.6% rise in revenues.
Bond Yields Rose to 17-year Highs Last Week
Last week saw the yield on the 10 year-Treasury intraday skirt the 5% level on back of Fed chair Powell’s presentation at an event hosted by the Economic Club of New York on concerns that the Fed could keep rates higher for longer.
We were not as surprised by the Fed Chair’s comments as much as by the equity market’s reaction to his words considering that from our view on the market radar screen the Fed’s stance on inflation and its 2% target has been stated and reiterated many times since the start of the current rate hike cycle in March of 2022. The good news in our view was that the Fed chairman clearly noted the degree of success the central bank has had in bringing the pace of inflation down and his view that the recent bond market’s pricing of the longer end of the interest rate curve may provide the Fed with enough assistance in curbing inflation (via higher yields) to offset the Fed’s need to keep hiking its benchmark rate.
We persist in viewing the Fed as being near if not at the end of the current rate hike cycle with the potential of one more 0.25% hike before the end of the year if warranted by inflation followed by probability of a long pause in the first half of next year with one hike again if warranted by sticky inflation followed by a potential rate cut near the end of 2024 should the Fed deem it necessary.
Our expectations are not as much for “higher for longer” but “relatively high” (compared to the prior period of ultra-low rates) until the Fed finds inflation suitably contained and at a level which will not impede the potential for economic growth at a sustainable pace.
Beware of Darkness
In periods of transition dogged by uncertainty and higher than normal risk, we have found in our experience that patience and diversification remain keys to success in positioning portfolios. While past performance is no guarantee of future results we consider keeping things in context of market history useful along with the adage attributed to the great American author Mark Twain, “History may not repeat itself but it often rhymes”.
In that light we’ll suggest our readers turn to page 13 of this report, which illustrates the performance of the S&P 500 during a period of high inflation (1971-1989) and Fed policy that failed during the tenure of Fed Chair Arthur Burns but succeeded mightily under the leadership and perseverance of his successor the late Paul Volcker and his successor Alan Greenspan.
A perusal of these tables suggests to us that history has shown that stocks can indeed rise in periods of high interest rates and tight monetary policy.
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