Looking at capital markets action this week, credit spreads have improved, the US dollar has fallen (as measured by the UUP), 10- and 30-year Treasury yields have failed to hit highs. new highs for weeks, PCE deflator data came in as expected, and fell year over year, and stocks rebounded strongly.
This week’s feedback:
- UUP: -1.38%
- HYG: +4.81%
- JNK: +4.87%
- AGG: +0.94%
- TO SPY: +6.59%
- Nasdaq Comp: +6.8%
- QQQ: +7.07%
You could call this week just a huge 7-8 week trend reversal.
The S&P 500, Nasdaq Composite and Nasdaq-100 remain very oversold, which is a plus.
The S&P 500’s rebound from 3,800 last Friday was a significant move: as this blog has repeatedly pointed out, the 3,800 level on the S&P 500 was a one-third retracement of the March 20 lows at early January 22 highs, which is (symmetrically, anyway) a perfect pullback or correction that doesn’t have to indicate that a secular bear market is at hand.
S&P500 The data:
- The 4-quarter forward estimate fell to $233.49 from $235.22 last week. The past 5-6 weeks has seen the forward estimate hover between $234 and $235 until this week;
- The P/E ratio on the forward estimate rose to 17.7x from 16.5x last week based on the 6.2% rise in the S&P 500 this week;
- S&P 500 earnings yield fell to 5.62% from 6.03% last week;
- The Q1 22 upward estimate for the S&P 500 rose a penny to $54.85 from $54.84 last week;
Observe expected quarterly EPS and revenue growth rates:
Note the slippage in all 2023 quarterly growth rates, both for the S&P 500 EPS and earnings. These tend to skip, but the 23 EPS cups stood out.
Over the past 7 weeks for the 4 quarter forward estimate, 4 weeks have shown sequential declines. Tonight’s forward estimate of $233.49 is almost exactly where it was on April 15, 2022.
It’s clear that the sell side is starting to get (at least) a bit more cautious as the Q1 22 earnings season ends, and companies reporting a May quarter will soon start reporting.
Summary / Conclusion:
The Treasury market has not seen higher yields on the 10-year and 30-year for several weeks. Whether it’s inflation or worries about the onset of a recession, there is some moderation in the onset of the “stagflation” argument.
The Friday, June 3, 2022 jobs report will likely reflect another quarter of 300,000 to 400,000 “net new jobs added” for the US economy.
There has been such a convoluted series of events over the past two years, including in Ukraine, that it is difficult to sort out the market implications for the various moving parts. Let’s sort the variables:
- Lower inflation – clear advantage for stocks and bonds. This morning’s PCE deflator was a start. Most disagree with the “disinflation” theme;
- Job Growth: Job losses are good for bonds, bad for stocks. Slower job growth and potential for wage growth slowing a clear upside, more so for stocks and bonds;
- Fall of the dollar: an undeniable plus, especially for non-Americans;
- Economic Data: It seemed to me that with the stock market over the past 3 weeks, concerns about the US entering recession seemed to be increasing markedly.
Remember, for those who were there in 1994, the FOMC and Greenspan raised rates 6 times, and the total return for 1994 for the S&P 500 was +1%. 1995 was a monster rally in the S&P 500 and it was 13 years after the start of this secular bull market.
Of all that rebounded this week, high yield yields were the most encouraging. Spreads were likely widening due to duration as much as credit issues.
It’s a guess. Take everything here with a grain of salt. None of this is a recommendation or advice.
Thanks for reading.
Editor’s note: The summary bullet points for this article were chosen by the Seeking Alpha editors.