Mixed Data for the Fed
What happened last week?
- The S&P 500 slipped -0.10%
- The Dow Jones climbed 0.63%
- The Nasdaq composite decreased -1.10%
On Friday, March payroll data showed 236K jobs being added, indicating “net” employment was still positive, while the unemployment rate remained low at 3.5%. Wage gains, at 4.2% y/y, continued to cool from a year ago pace of 5.9%.
Peering ahead, the global fight against inflation is entering a new chapter. According to the NY Fed’s Global Supply Chain Pressure Index, stresses from global transportation costs and regional manufacturing disruptions in seven economies are back to normal. These regions are the US, China, Japan, the Euro area, South Korea, Taiwan, and the UK.
3 Things to Know
Getting To a Better Tomorrow
Global share prices and most bond yields have been stuck in a trading range for four months now. This is despite the rapid collapse of three notable banks on both sides of the Atlantic and increasing signs that recessionary forces are building in the US economy.
Shares in US and non-US markets are down 16% respectively from their record highs of 2021/2022. And even after recent rallies in the bond market, US government yields are up 3 to 4% across different points of the yield curve relative to 2020.
Amidst all this, a violent rotation out of the most speculative investments to the most conservative income-generating assets has taken place.
The realignment of markets reflects the fact that we are perhaps “two-thirds” of the way through a bear market and this has improved our long-term return expectations.
We Have a Recession to Get Through
There is a huge divergence between analyst estimates for corporate earnings and our view of them. Analyst EPS estimates for the first quarter of 2023 are expected to reflect a 7.5% drop in profits for the S&P 500 relative to a year ago.
This seems reasonable. Yet, looking at the same industry analysts’ second quarter estimates (April–June 2023), an immediate earnings rebound is anticipated. Analysts expect a 7% improvement in 2Q23 profits. This would be the equivalent of a +31% annualized earnings growth rate using the same method that GDP estimates are based upon.
The gains in profits they estimate are across the entire spectrum of market caps, though varying across industries.
Our views of corporate earnings are very different than these analyst estimates. In our expected case, a low in corporate profits may occur by the third quarter of this year.
Cracks in the Economy Are Growing
While the Federal Reserve is committed to fighting inflation and holding rates “higher for longer”, there are increasing signs that the economy is weakening in a meaningful way.
Private employment gains slowed to below +200,000 in March for the first time since 2020. Construction employment showed the first sizeable decline of the cycle.
We remain confident that employers in manufacturing and housing will choose to reduce employment and related labor costs in the face of declining demand and rising wages.
See our weekly CIO Strategy Bulletin for more details