My Work Suggests More Downside Ahead

Fed Vice Chairperson Lael Brainerd’s comments on Thursday supported the hawkish thesis I’ve been repeating for many months, and arguably took the quick end to Fed tightening off the table for now. Despite a few glimmers of hope and some evidence that headline inflation has peaked, the latest readings remains well above the central bank’s target level. Hence, I reiterate my expectation that the inflation fighting actions from the FOMC will likely remain in place until there is irrefutable trend that progress has been achieved.  Notably, the hawkish Fed is converging with other risks and a weakening indicator backdrop is portending that there’s a high likelihood that there is more downside for the S&P 500 in front of us.  Additionally, my proprietary earnings revisions work is flashing a worrisome signal that a profit cutting cycle by Wall Street analysts is slowly occurring and much more is yet to come, which will likely hit all things cyclical the most.  Ugh, the road ahead remains filled with challenges before the equity markets have a chance to get back to a smoother path based on my work. 

Another wrinkle that hasn’t been front center is the negative impact that the strength in the U.S. dollar is going to have on corporate profits as the greenback is up nearly 15% yr/yr.  Indeed, Microsoft may have been the canary in the coalmine for FX risk as the announced a nearly $500mm shortfall for its next quarters operating results.  The strong dollar will surely hurt the earnings of many large-cap companies with international footprints. Based on my analysis, I expect further declines in earnings revisions, and investors should keep this in mind before chasing any rallies too aggressively. 

With all that being said, if you consider yourself an investor with a longer-term horizon and is less sensitive to pullbacks then one could do some nibbling in your favorite names on weakness.  For example, if you could buy a stock for $100 and my crystal ball said it was going to $150, would you be a happy buyer at $100?  Ok, let me add a new piece of information and say that before that $100 stock went to $150 that it fell to $85.  How do you feel now about potentially putting money to work at $100?  If you are still satisfied and happy, then you could do some light nibbling on weakness.  However, if the move below your cost basis would leave you feeling unhappy, then my research and key indicators suggests that we will likely get better buying opportunities on the horizon.  So, do some introspection and know what your goals are for your investment portfolio.

Be on the lookout for my upcoming weekly Whispers note and my FSI Sector Allocation update that should be out next week.  Hang in there, be disciplined, and stay alert for opportunities.

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