Markets had their fourth consecutive week of losses. Friday was a particularly bad day with all the major indexes down more than 2.5%. The Dow had its worst one-day loss since the dog days of COVID-19. Some of the key losers dragging the stalwart index down were United Health, Caterpillar, Home Depot, and Visa. The index has been down 9 weeks out of the last 11. This is definitely a quarter where missing results will not be taken lightly. One recurring theme is that many companies are giving tepid to bearish guidance about sales growth in coming quarters. Beat rates have mostly been in line with recent quarters.
Thursday had started out quite strong and markets reversed abruptly in wake of Powell’s comments which were exacerbated by some tough earnings misses. Some companies beat estimates and still suffered because of guidance. Powell did mention inflation might be peaking, but markets didn’t take much solace in that statement. The 10-year peaked around 2.95 after Powell’s comments and retreated on Friday by about 5 bps to 2.904%. The next big catalyst in the upcoming week will be the Tech Titans reporting earnings. These massive market-cap companies might either draw a line of support in the sand, so to speak, or if they show headwinds, it could make the selling a lot worse. Another big thing to watch next week is the release of the Fed’s preferred gauge of inflation the Personal Consumer Expenditures Index (PCE). This will be the last reading before its next meeting in May. The week ahead includes reports from Microsoft, Alphabet, Meta, Apple, and Amazon before the next major inflation reading. So, keep your eyes peeled friends.
Obviously, folks are holding their breath more than usual after Netflix had a major miss and the first contraction in subscriber growth in many years and dropped over 35% as a result. It will be interesting to see whether the other big streamers will suffer similar headwinds or whether it was a more company-specific issue. The streaming wars and the war in Ukraine both seem to be marked by a key feature: attrition. Streamers are having to spend more and more on content to achieve diminishing returns for shareholders. The protracted trench warfare that seems likely in the coming weeks is an apt metaphor.
Remember aside from the metaphorical carnage in markets, one of the main catalysts that continue causing uncertainty is the actual carnage in Ukraine. A brave and historic resistance continues in Mariupol where a contingent of Ukrainian fighters continue to hold out against overwhelming firepower and numerical odds. While most of the resistance has been cleared a persistent contingent remains in a steel plant despite repeated efforts of Russia to declare victory.
Evidence of mass graves in the destroyed city makes any progress on negotiations less likely. They also elevate the prospect of a more extensive European boycott of Russian Energy, which will be painful for both sides and will ratchet up the upward short-term pressure on oil. It may take some time and improvements in infrastructure for a boycott of Russia’s natural gas to be viable. However, while European economic dependence on Russian gas is very high oil sales make the Russians more money. The Bundesbank estimates a gas boycott would result in 5% lost to output.
According to the State Department, official images and reports of atrocities suggest they are of a systematic and intentional nature. The US and allies are continuing to send heavier weapons to help Ukraine fight a more traditional high-intensity conflict than what has transpired so far. President Macron currently has an edge, but a unified NATO front may be shaken if Marine La Pen achieves a surprise upset in the French Presidential election.
COVID continues to plague the Eastern world and China’s zero COVID policy is becoming more controversial and less economically viable. Despite the rising concerns, official sources in China have said efforts should not be made to reverse the policy and “coexist with the virus.” The zero COVID policy was initially considered a success by President Xi Jinping and making a nimble policy shift in authoritarian countries is highly difficult. It is even difficult in democratic countries like our own. An antiquated law called the Jones Act which requires domestic ship traffic between US ports makes our own supply chain issues a lot worse. Sensible changes in the policy are routinely opposed by legislators from states with large shipbuilding industries.
On the brighter side, American Express reported great earnings and provided some of the evidence of green shoots in battered levels of business travel. Business travel has had fits and starts as rolling waves of the virus have derailed plans. However, travel spending by S&P 500 companies has now reached well over 50% of the level it was in 2019. While this may seem low it is a start. Larger legacy airlines with sprawling hub and spoke networks are generally much more dependent on business and international travel than their low-cost carrier (LCC) counterparts. The company beat expectations and maintained its profit outlook for a strong seasonal boom in travel which should be helped along by pent-up demand.
The market continues to see a defensives posture. Utilities and REITs continued to outperform. On a 1-month basis, the leading sectors have been Staples, Real Estate, and Utilities. Energy, Materials, and Healthcare have also been up over the last month, and Technology and Communications Services led the downside over that period. One thing is for certain: more will be revealed next week with some of the stock market’s biggest and most important names reporting. One notable positive report was Tesla which beat expectations and grew revenue by 81% YoY. The company appeared to have successfully navigated supply chain difficulties better than the consensus expected. Some of our team is becoming more bearish than others, but even those who are less enthusiastic about prospects for equities in the coming weeks think that a move downward below February lows will be an excellent opportunity to accumulate quality stocks at lucrative prices from a risk/reward standpoint. Hang in there friends, it could remain treacherous and bumpy.
