“Hedge fund hell.” “$34 chicken wings?” “El-Erian says US can’t avoid stagflation.” “Americans more stressed about money than ever.” “Vast swath of US at risk of summer blackouts.”
That (somewhat random) sample of headlines captures the prevailing macro zeitgeist. Two years on from the worst public health crisis in a century, it’s not going particularly well.
Not that anyone needs a reminder of what it’s like out there. The sense of malaise is inescapable. The well-to-do mourn their ailing 60/40 portfolios. Jerome Powell’s “normal economic people” sigh, half-exasperated, half-fatalistic, at the punitive sums displayed on the digital readouts at the gas pumps. Lower-income cohorts consult their checking account balances before going to the grocery store.
“Things are breaking down,” a frustrated customer complained, as I stood in line at the post office just after lunch Wednesday. He’d given up on his COVID mask. It was dangling off the side of his face, hanging by one ear loop. “It’s just the mail,” I said. “You’re more patient than me. Wait until you get older.” “I’ll wait. Remember, I’m patient.” I got a chuckle out of him. He left. I waited.
On Wall Street, equities crumbled. Results from Walmart and Target suggest retailers are struggling to cope with margin headwinds and logistics. As I put it Tuesday, it’s never good when Walmart is surprised. Target’s remarks on excess inventory and lackluster demand for consumer discretionary items were ominous. The S&P suffered its worst session of a bad year, falling almost 4% (simple figure below).
It was the fifth session in 2022 that the world’s risk asset benchmark par excellence shed 3% or more in a single day.
I’d suggest equities are coming around to the reality of the Fed’s message, as driven home emphatically by Powell on Tuesday. If the Fed pursued a shadow mandate of asset price inflation during the post-financial crisis years, policy is now calibrated to achieve the opposite. The Fed is in the process of orchestrating a controlled demolition. They’ll start with stocks. If that proves insufficient, they’ll move on to home prices.
Retail shares dove 8% Wednesday. It was among the worst routs in recent memory (figure below).
Business Insider said Amazon’s retail business will hire fewer employees than initially planned in 2022. According to a leaked internal email, the company’s worldwide consumer team slashed its hiring target by more than 1,500 people. The cuts apply to corporate employees, not hourly warehouse workers. Recall that while discussing quarterly results last month, Amazon suggested it had too much warehouse space and more workers than it needed.
Evidence to support a slowdown is accumulating. Not only is the Fed committed to tightening irrespective of any downshift in the economy, policymakers are keen to perpetuate the situation as long as it doesn’t go too far.
“While most participants are refraining from giving forward guidance beyond 60 or 90 days, comments from Charles Evans and Powell highlight a growing consensus on the FOMC that even if the Fed sees inflation begin to slow, they will continue hiking rates until they are convinced trend inflation has settled at 2-2.5% YoY on a core PCE basis,” Nomura’s Rob Dent said. There’s quite a bit of work to do in that regard. The Fed can’t even see 2% from up here (figure below).
“We think this is consistent with our above-consensus 3.75-4.00% terminal rate forecast and expectation that after front-loading hikes to reach 2.25-2.50%, the Fed will slow to a 25bps per meeting pace later this year,” Dent added.
In the meantime, stocks are trying to find a bottom. But for the first time in many market participants’ adult lives and/or professional careers, that exercise isn’t just a matter of figuring out where the “Fed put” is struck. If it still exists, it’s clearly nowhere near SPX 4000. If there’s any truth to the notion that the excesses of pandemic-era stimulus are the driving force behind labor shortages, it’s possible the Fed wants to see the majority of the equity gains notched over the last two years erased. If that’s even a semblance of accurate, they have a long way to go.
The curve bull flattened Wednesday, with the long-end richer by up to 10bps. At least bonds were some help in offsetting the equity losses. But that was small comfort, especially considering the extent to which you could read the duration rally as indicative of a growth scare.
Amid the fireworks, it was important not to lose track of the key takeaway. At a time when investors and traders are routinely compelled to reconcile a complex array of headlines and macro threads while attempting to craft a coherent narrative, Wednesday’s story was refreshingly straightforward — or as “refreshing” as a stock plunge can be.
“Equities are losing their appeal as a natural inflation hedge,” BMO’s Ian Lyngen and Ben Jeffery said, in a wonderfully succinct summary. “In an environment in which elevated input costs can be passed through to end-users, higher prices will cushion profitability [but] later in the cycle (perhaps now), consumers are unable to maintain prior patterns of spending given inflation in necessities,” they added, noting that Target’s results were blamed for Wednesday’s selloff. “Investors are now left to ponder if the decline in the share prices of consumer staple retailers will ultimately prove the ‘Aha’ moment that signaled the beginning of the end for Powell’s soft-landing ambitions.”
Yup, many posts and comments have presaged today: “it’s going to get worse before it gets better”.
Powell is trying to channel Sullenberger. Very unlikely to land it on the Hudson. I am hoping the Fed will be able to engineer a slowdown without causing a DEEP recession. Still possible, but not very likely. All the so called experts talking 4-5% terminal rate for Fed fundsare crazy in my view. This rebound is unwinding very fast, and we are already at an inflection point. What a lot of the analysts citing history are missing is that our economy is far more leveraged in the last 15 years than prior times. So it does not take that much tightening to slow things down. Growth peaked in April 2021 according to Eric Basmajian- and he uses data. You are not going to see a 4% 10 yr. given what is happening…….
well said, RIA…I’m still thinking we’ll see a “Powell Pause” announcement at Jackson Hole…should be dicey between now and August for sure…WMT and TGT could be the tipping point into deep selloff / panic … not seeing any reasons to be buying right now though I did pick up a couple copper miners (SCCO, FCX) earlier this week as I saw value there though it may not play out for a while…
H-Man, it appears that today was simply repricing the market based upon what companies are reporting. Methinks there is more repricing to come as more companies report. Kohl reports in the morning before the market opens. That may set the tone for the day.
H, thanks. I’m slow to take your advice sometimes, but I finally sold all the BTFD shares I’d picked up in recent weeks and even went short a small position, because that’s what not fighting the Fed means at this point. So today felt less bad than it might have, and I thank you. Back on SA, so many naysayers would drop by your posts just to scoff “Nothing actionable here”, but I’m glad to have followed you here.
Fed communication channel finally coming in clearer. Pay me now, or pay me more later. Looks like in the real world, pricing is finally destroying demand in some corners (mortgage apps, copper?), while on Wall St, the market is reacquainting itself with the taste of actual price-seeking. In a non-scientific, non-random sample of 13-Fs this week, was surprised by the number of deep cuts in relatively core positions, and the general increase in concentration (fewer positions). Less diversification in this liquidity/volatility environment is the stuff that sometimes make a hedge fund go boom, especially when they’re trying to make up for a miserable Q1. Finally, hard to believe that Russia is merely going to be a payments-related hiccup and not a more systemic/contagious issue, but somehow, so far, so good. So far.
Not going to be a “soft” landing for stocks, but we knew that. Whether we touch down hard with spilled drinks and wetted nether-garments, or auger in leaving a crater and a black box, is the question.
For the economy . . . the softness or hardness of landing remains to be seen. A technical recession (2 consecutive qtrs neg GDP) and a profits recession (stall or decline in corporate profits) seem likely, to me. As does weaker discretionary spending and reverse wealth effect-driven belt tightening. And I don’t think we have to wait for 2023. But a “significant” recession, with major net job losses, cascading business failures (other than crypto-schemes and formerly 60x P/S tech-mirage companies), lots of foreclosures, attendant Main Street misery? I don’t think that is a high probability scenario, right now.
Which means that starting now and increasingly over the coming quarters, we may see valuations falling to levels consistent with a significant recession, but fundamentals falling to levels consistent with a mild recession.
I’m starting to get excited. Remember almost exactly two years ago, when there all those bargains, and pundits were saying “this is the worst environment for stocks I’ve ever seen” or something like that, but if you had cash and did the work there were entry points galore?
No, I don’t think we’re going to double from the coming lows in a mere 18 months. The tsunami of stimulus that we just saw, and that is being withdrawn, isn’t likely to be repeated. One hopes not, anyway. But when you are starting to see some solid stocks sniffing around the ballpark of GFC valuation lows, that’s gotta be interesting.
Following up – running CSCO through a DCF model and adjusting assumptions to see what current price might be discounting, gets as one possibility FCF -5% CAGR 2022-26 then terminal gro +2% (i.e. inflation).
Sounding like a broken record here I know, but it is time to do the work. If “external” factors (Russia, Covid) don’t deteriorate significantly, I think the time for cash deployment may be closer than one might think. I wouldn’t think it will be a liquidity-fueled tide raising all boats. Some boats deserve to sink.
I guess I’m dense but why the hell is everyone selling? Unrealized losses only become real losses when one sells. It seems we retail punters can be counted on to do the wrong thing and sell into deep downdrafts, toward the market bottom. Buffett is buying. On Black Monday in Oct, 1987, I was stuck in an all day type meeting, knowing the market was plunging. Finally, at 2:30 I got to a phone and started to buy. I didn’t sell a single stock but took every dollar I could get my hands on to buy. I’m not a genius; I just couldn’t believe everything was on sale so I had to go shopping. Kept buying the next morning as well. I still have a lot of what I bought then. What a break. I’ve only sold a couple of things this year but I have made some nice buys. Rates are rising and bonds are getting nice and cheap.
Mr. Lucky, you are likely in the good company of corporations, who are executing share buybacks – hand over fist.
US economy still looking better than any alternative.