Last week’s equity rout in the US was “especially vicious” and suggested stocks have entered the “next phase of the bear market.”
That’s according to Morgan Stanley’s Mike Wilson who, in a Monday note, delivered a compendium of grim quotables.
In this new phase, it’s possible that “virtually nothing” will work for investors, including defensives, he said, calling the most recent leg down “even worse” than it might appear considering the cumulative advance / decline line made new lows.
Suffice to say Wilson wasn’t as quick to dismiss Q1’s negative GDP print as some of his more constructive peers. “Negative fundamental data points are piling up as they tend to follow stocks that have been signaling bad news was coming,” he wrote. “Q1 GDP at -1.4% fits the bill.”
The macro evolution in the US is playing right along with Wilson’s thesis and remarks from Amazon late last week were similarly evidential. I tied the two together over the weekend here, and Wilson elaborated on Monday.
“Our thesis has been centered around payback in demand from consumers on the goods side post-COVID [and] excess inventory build,” he wrote, recapping, on the way to citing the large increase in inflation-adjusted durable goods imports as evidence that supply chains are normalizing, opening the door to the realization of Morgan’s inventory risk scenario.
Wilson conceded that a portion of imports “fed straight into consumption for the quarter,” but the figure (above) suggests inventory levels are rising rapidly.
There are two potential offsets. First, China’s adherence to “zero COVID” and any accompanying logistics frictions could hinder progress on supply chains, but that would hardly be a positive development. Apple’s suggestion that supply chain disruptions could cost the company as much as $8 billion in revenue this quarter overshadowed record results last week, for example.
Second, consumer demand for discretionary goods could hold up, allowing for the absorption of excess inventory. Wilson is skeptical, though. “We see demand actually eroding for consumer goods due to high prices and overconsumption post-COVID,” he said Monday, citing familiar evidence that suggests Americans view buying conditions very unfavorably amid soaring inflation and falling real wages. The figure (below) captures it quite well.
Wilson wasn’t done. He also cited rising inventories relative to top line growth for what he described as “goods-oriented subgroups” in the S&P.
It’s clear, he remarked, that inventories are now growing faster than revenues. In fact, that appears to be the case for the majority of S&P industries.
As for wages, the problem is straightforward. Q1 ECI data showed compensation and wage costs growing at the briskest pace on record (figure on the left, below) but in real terms, wages and salaries are falling rapidly (figure on the right).
While wage growth is “clearly elevated, it’s not high enough from a consumer standpoint to offset the rise in prices across basic necessity categories [like] energy and food,” Wilson wrote, before immediately noting that “at the same time, it is high enough to cause margin misses for corporates in both Q1 results and out quarter/year guidance.”
The bottom line, from his perspective, is that Q1’s negative GDP surprise “may not be a one off.” Going forward, he cautioned, any deceleration “may be more about consumption than net exports.”
Although you wouldn’t know it to read most of the analyst commentary, personal consumption missed estimates in the Q1 GDP figures. And not by a small margin, either.
If I had to guess, a larger chunk of the personal consumption miss was driven by the sunsetting of the child tax credit. And for those who reviewed the benefit, most of them are hit extremely hard by the “gas tax”.
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