Market moves outside consensus expectations this year


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Stocks rose last week, with the S&P 500 closing 0.4% higher. The index is up 12% year-to-date, up 20.2% from its closing low of 3,577.03 on Oct. 12 and down 10.4% from its all-time closing high of 4,796.56 on Jan. 3, 2022.

On Thursday, we finally got confirmation that the bear market ended in October and has since entered a new bull market.

We also recognize that so far this year the market has been bullish and far outside of consensus expectations.

Let’s turn back the clock.

“Exaggerated” Concerns 🤏

In December, I published an article summarizing Wall Street strategists’ outlook for stocks in 2023. “Strategists expect a volatile first half to be followed by an easy second half, which could give stocks a modest boost,” the point said at the time.

The big concern was that the temporary slump in earnings growth was bearing fruit to some extent, and that stocks would sell off again.

But at the time, a handful of analysts, such as Oppenheimer’s Ari Wald, had analyzed the numbers and concluded that “concerns are exaggerated.”

Not only is there a very weak linear relationship between the year-to-year earnings change and the year-to-year S&P 500 price change, but the earnings trough is actually Running late market indicator. Moreover, history shows that more often than not stocks have risen rather than fallen in years when profits have fallen.

“Most Popular” Concerns 👯‍♀️

There was also the problem that many experts openly claimed that the stock market was sluggish in the first half of this year. This prediction is Barron’s cover!

At the time, two of Wall Street’s most savvy strategists I follow spoke out on this. From his TKer on December 18, 2022:

“I think it will go down and then go up … The problem is that view is becoming more and more the consensus. I think.” – Savita Subramanian, BofA, December 7.

“Everyone, and their mothers, brothers, sisters, cousins ​​and uncles have been feeling negative for the first half of the year…so we’re going to come out and do something a little different. Weakness is probably , I don’t think it will last this long.” Everyone thinks. – Brian Belski of BMO Capital Markets December 16th

When it comes to risk, the more market participants talk about risk, the less it matters to the market. Because that means risk is probably priced in.

In fact, it’s mid-June, and the stock market has been mostly trending upwards for the first five and a half months of the year. The S&P 500 hit a small deficit on Jan. 3 and he on Jan. 5. I am in the green every day.

“The most popular prediction going into 2023 was that the market would struggle in the first half, but would recover by the end of the year,” said Michael Arone of State Street Global Advisors on Tuesday. rice field. “However, equities and bonds have refused to follow consensus expectations.”

In recent weeks, strategists across Wall Street, including Goldman Sachs’ David Kostin, have revised their year-end stock price targets for the S&P 500, shifting the consensus. 4,500 4,000 to 4,000), Brian Belsky of BMO Capital Markets (4,300 to 4,550), Savita Subramanian of BofA (4,000 to 4,300), Lori Calvasina of RBC Capital Markets (from 4,100 to 4,250).

big picture 🤔

To be clear, this is not meant to be a glorification of bear market timer mistakes.

More importantly, even if we know where the fundamentals are heading, it’s very difficult to accurately predict short-term movements.

And making a bearish move in a normally rising stock market is especially dangerous. You risk missing out on big short-term gains and irreparably damaging potential long-term gains.

Confirming macro crossflow 🔀

There were some notable data points and macroeconomic developments to consider last week.

🛍️ Consumer spending is holding up. From Bank of America: “Internal Bank of America data showed consumer spending was broadly stable in May, with Bank of America’s total card purchases per household, seasonally adjusted, down from the previous month. (YoY) The growth rate is still negative at -0.2% YoY.”

From JP Morgan: “As of June 4, 2023, our Chase Consumer Card spend data (unadjusted) was up 2.2% year-over-year. Chase Consumer Card data through June 4, 2023 Based on the data, the U.S. Census’ estimate of May retail sales month-over-month control index is 0.46%.”

💵 Increase in household net worth. Bloomberg reports on new Federal Reserve data: “Household net worth increased by $3 trillion (2.1%) to 148 trillion in the January-March quarter after rising $1.6 trillion last quarter. $800 billion, a Federal Reserve report showed Thursday. The value of equity holdings increased by about $2.4 trillion in the first quarter, while the value of real estate owned by households decreased by about $617 billion. “

💵 Consumers have excess savings. Apollo Global’s Torsten Srock estimates that households still have an excess savings of $1.2 trillion.

That’s slightly higher than the $500 billion recently estimated by the San Francisco Fed. In any case, the bottom line is that consumers have a large excess of savings, which is why consumption remains resilient.

💳 improve delinquency rate. Here’s Apollo Global’s slock on Transunion’s monthly data: “The latest data show a slight improvement in credit card delinquencies and auto loan delinquency rates for subprime, near-prime and prime borrowers. See the chart below, which is the opposite of what we expected.” The Fed is trying to tighten financial conditions. “

💸 Wage growth is slowing. From Indeed Hiring Lab: “According to the Indeed Wage Tracker, wages and salaries listed in Indeed job listings increased 5.3% year-over-year in May, the highest level recorded in January 2022. That’s a significant drop from 9.3%, but it’s still good.” “

💼 Increase in unemployment claims. The number of initial unemployment claims filed for the week ending June 3 was 261,000, up from 233,000 the week before. Although this is an increase from the September low of 182,000, it continues to hover at levels associated with economic growth.

Economists at JP Morgan said: “This move could very well be distorted by the difficult-to-seasonal Remembrance Day holiday. Moreover, this is only a week’s move. Still, should this level persist. It would signal a further softening of the economy,” he said. labor market. “

🛢️Gasoline prices drop as summer driving season begins. From AAA: “For the first time since 2021, domestic gasoline demand exceeded 9 million barrels per day for the third straight week. The national average for a gallon of gasoline fell a penny from last week to $3.56…Today’s national average of $3.56 is down from a month ago. Three cents higher, but $1.39 less than a year ago.”

⛽️ Consumers are out on the road. Gasoline demand is up from a year ago, according to weekly EIA data through June 2.

⛓️ Supply chain pressure will ease further.New York Fed Global Supply Chain Pressure Index

1 (a combination of various supply chain indicators) fell in May, well below levels seen pre-pandemic. That’s a significant drop from the December 2021 supply chain crisis high. From the New York Fed: “British order backlog and Taiwan delivery made significant downward contributions. Eurozone delivery and order backlog were the biggest upward pressure drivers in May. The underlying data shows: All local readings tracked by GSCPI are below historical averages.”

👍 Service survey mixed, but reflects growth. S&P Global’s U.S. services PMI rose to 54.9 in May, signaling accelerated growth. From the report: “Businesses in sectors such as travel, tourism, recreation and leisure are enjoying a post-pandemic mini-boom as spending shifts from goods to services. Survey data shows GDP growing at just over 2% annually. The improvement in business expectations indicates that growth remains strong heading into the summer.”

May’s ISM services PMI fell to 50.3, slowing new order growth, indicating slower growth in the sector. Although inventory has returned to an increase. In addition, price growth slowed.

🎈 Profit Margins Drive Inflation. New York Fed (HT) Tracey Alloway) found “maintaining stable profit margins” to be the second most important factor influencing corporate pricing.

🏢 the office is very empty. From Kastle Systems: “Kastle’s 10-city return-to-work barometer showed office occupancy fell 1.4 points to 47.6% over the last holiday week. A decline was seen in the follow-up cities, where city occupancy rose by two-tenths of a percentage point to 49%.”

📈 Near-term GDP growth forecasts remain rosy. The Atlanta Fed’s GDPNow model projects real GDP growth of 2.2% in the second quarter. While the model’s estimate is off the high end, it is still a significant increase from the initial estimate of 1.7% growth on April 28.

All together 🤔

Despite the recent turmoil in the banking industry, there continues to be evidence of a bullish ‘Goldilocks’ soft landing scenario in which inflation cools to manageable levels without the economy slipping into recession.

The Fed recently adopted a less hawkish tone, acknowledging on February 1 that it “acknowledged for the first time that the disinflationary process has begun.” And on May 3, the Fed suggested that the end of rate hikes may be near.

In any case, inflation needs to fall further before the Fed is comfortable with price levels. Therefore, we should expect central banks to continue to tighten monetary policy. This means preparing for a prolonged period of stressful financial conditions (higher interest rates, tighter lending standards, lower equity valuations, etc.).

All of this means that the market slump is likely to continue for some time, and the economy faces a relatively high risk of slipping into recession.

At the same time, it’s important to remember that consumers are coming from very strong financial conditions, while recession risks are rising. The unemployed are getting jobs. People with jobs are getting raises. And many still have surplus savings to tap into. In fact, strong spending data confirms this financial resilience. It is therefore premature to sound alarm bells from a consumption perspective.

At this point, any recession is unlikely to escalate into an economic disaster given that consumer and business financial health remains very strong.

And as always, long-term investors should remember that recessions and bear markets are only part of the trade when entering the stock market with the goal of generating long-term profits. The long-term outlook for stocks remains bright, even after the market has been pretty tough in recent years.

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