“This call has proved wrong,” said Eric Johnston, head of equity derivatives at Cantor. “It no longer makes sense to own equities.”
The recant at Cantor was notable. The notion that stocks were poised to stage a bear market rally — a tradable rebound before ultimately trekking lower — had become almost as consensus as US recession calls. Jerome Powell’s hawkish fortitude (on display during a Tuesday Wall Street Journal event) and the macro warning embedded in disappointing results from Walmart and Target, undermined the case for a tactical bounce worth trading.
Johnston said as much. “While a bounce may still happen, if it does it will be much shallower than we once thought,” he remarked. His rebound call was barely two weeks old.
Sentiment continued to deteriorate on Thursday, as European and Asian shares fell, while Wall Street nervously eyed Cisco. The company delivered a remarkable top line guidedown, sending the shares sharply lower. Sales in the current quarter will fall by between 1% and 5.5%, the company said. Previously, Cisco expected top line growth of 6%.
CEO Chuck Robbins was adamant that demand isn’t the issue. Rather, it’s a supply problem. “Customers are not signaling any real shift at this point,” Robbins said. I assume this goes without saying, but Cisco matters. It’s a bellwether.
The shares were already having a tough year (figure below). Thursday was a rough session.
At the least (i.e., even if you accept Robbins’s contention that there’s no evidence of a meaningful downshift in demand), Cisco’s supply chain problems, and particularly the company’s commentary on the impact of China’s rolling COVID lockdowns, was troubling.
Speaking of China, Tencent said the long shadow of Xi’s tech crackdown won’t lift as quickly as policymakers in Beijing seem keen to suggest.
Near daily pledges to wind down the blitz on platform companies haven’t been successful in propping up a sector beset with regulatory concerns. It’s been 18 months since Ja Ma spurned global regulators, prompting an aggressive backlash from the Party (figure below).
The losses are catastrophic. The Icarus metaphor is a cliché by now. But if it applies anywhere, it applies to The Hang Seng Tech Index, the poster child for Xi’s iron-fisted approach to reining in unruly capital.
Seemingly realizing things went too far at a time when the Chinese economy is facing myriad headwinds, policymakers have stepped up support calls in an effort to stanch the bleeding. This week, Liu He himself promised China would “support the development of digital economy companies and their public listings.”
Investors are forgiven for casting a wary eye. Tencent’s results were a debacle. “Almost nothing went right,” Bernstein’s Robin Zhu marveled. Sales were flat and profit dove more than 50%.
It’s against that daunting backdrop that global equities are at pains to find the lows.
“The hallmarks of a bear market are quickly emerging. The negative story cycle is just getting underway,” JonesTrading’s Mike O’Rourke said. “Companies that were once thought infallible are stumbling daily,” he added, noting that “the absolute key takeaway is that investors cannot have faith in current 2022 earnings estimates.”
It’s not even the middle of the year yet and the housing market has barely budged. This makes me think the stock market meltdown is going to be pretty epic this round.
Does anyone still think the Fed’s terminal rate now is 5%? What typically happens when profits start rolling over is that employment gets cut. Due to demographics/covid that will probably be different, but you can pretty much see the writing on the wall here. Hiring is not going to be nearly as robust going forward- the quit rate is going to drop and the churn in the labor market is going to drop soon. Nobody knows when the supply chain problem will finally unwind. But the retailers lower result would suggest that the consumer’s market basket is starting to shift back from goods to services. That should quickly bring good’s inventories up. Its going to be tough to travel though and hotels and restaurants will be full to the extent they can staff up. Until that shoe drops- and lower demand spreads. Stagflation is here for the time being- but its a good bet that morphs into a slowdown and inflation goes down. As for housing and autos- well housing will be lucky to have a flat number of years. Auto sales will hold up for awhile due to pent up demand aging fleet- but that adjustment won’t take too long either. To sum- the Fed’s terminal rate is going to be more closer to 2% than a lot of those 3+ handles. Our economy is far too burdened demographically, and leveraged far too much for that to happen at least this go around.
Employment will be cut but how long will that take to catch up to the 11.5M overage and raise unemployment the half percent required? The services sector will also continue to be impacted by Covid which is just now starting its next wave in the US. Auto sales are still impacted by supply chain problems which is reducing output, the aging fleet can’t be replaced fast enough by lack of inventory and high markups combined with higher borrowing costs. China’s Covid Zero protocol is going to amplify inflation even further as they are the key cog in most supply chains and their policy is clearly not working. Housing is due for a GFC level downturn because, as it has been pointed out here repeatedly, the average home price now prices out everyone below upper middle class. I don’t think it’s possible to set a reliable target on the Fed’s terminal rate because what they are trying to impact is a supply problem that China has a lot more control over than they do. I agree stagflation is here, I just think that it’s going to hang around a lot longer than anyone wants.
My daughter is 50 and she and her husband both have IRAs and 401(k)s. I suddenly realize that they, and many folks from 50-55 are going to take unrealized losses, that while they don’t have to be realized, will eat up the precious time required for compounding. If it takes even five years for all this to come back, five years at 8% lost will mean folks will have foregone a 50% increase in their assets that will not happen. That’s a huge dent in prospective retirement income. Glad I am old.
stay young and strong, Mr. Lucky…at least until the November midterms, then a reevaluation may be in order…your daughter is lucky to have you around, and IRA’s and 401K’s need to be rebalanced every so often…
Looks like “buy the dip” has morphed into “sell the blip”.