Markets Increasingly Disconnected From Macro On Soft Landing Odds
Equities are increasingly priced for a soft landing.
You can look at that one of two ways. If you're an optimist, you could argue efficient, forward-looking markets know best, so the odds of a soft landing must've gone up recently.
If you're a pessimist (and, with apologies, being a pessimist is very often synonymous with being a realist) you might contend that far from being efficient, markets, and particularly equity markets, are too beholden to the vagaries of human emotions to be trusted.
The macro data is confusing. Classic indicators (LEI, yield curve, CRE, etc) are very negative. Other datapoints (estimates, consumer, housing, etc) look tentatively bottom-y. The Covid disruptions are confounding. The Fed’s rate campaign is stuttering, and its actions are increasingly dovish. Inflation makes data harder to interpret.
The bullish case is that rates are not going much higher (after 500, what’s another 50), S&P 500 estimates have troughed (are rising, if you look at rolling N12M), valuations can be rationalized (or ignored), and there’s too much money out there that needs to go somewhere.
The bearish case is well articulated by Wilson et al.
Suppose 2Q earnings and guidance comes in positive, or not-negative. Can investors ignore two consecutive quarters of upside, or not-downside?
I am expecting Q2 to be similar to Q1 in better than terrible fashion, beating estimates nonetheless. I am expecting equities to trend down the next 3-5 weeks, but “positive” earnings to be the wing beneath the bullish wings for 2-3 months thereafter.
Q3 is when I expect the earnings (possibly top-line as well) misses. Finance sausage making (aka financial reporting) has grey areas that allow for some manipulation, not generally in total outcome, but in timing and treatment. Corporates have been squeezing every last drop out of earnings for the past few months, without economic upticks (as H says in the article, data is not upticking) They can only keep up the charade for a few quarters.
Not exactly sure how this impacts the odds for a soft landing- but non-OPEC producers (led by US, Brazil and Guyana) are expected to increase production by 5.1M barrels/day over the next 5years, more than compensating for OPEC’s stated willingness to only increase production by 800,000 barrels/day.
Plus, $35T of wealth held by the 70plus crowd (37M) in the US. As this crowd passes, the wealth will either get spent by the heirs- homes, vacations, eating out, luxury items cars, etc. or invested. Parents who did not spend much of their money and kept money in CD’s have children who will, instead, invest in SPY or spend it.
Yet another part of my bullish thesis. If there is a dip, I think it will be short lived.
my recession indicator is door dash, uber eats and draft kings. I call these convenience and ultimate discretionary stocks. I will be interested to hear what these companies say in their next earnings calls. all three are flying high now. it is hard to see how the economy can be in a downturn when people can spend money on these services. When the economy turns, people will still eat McDonalds and Taco Bell but they will pick it up themselves.
H wrote an article about DG earnings disaster a few weeks back and today was WBA turn. I also see those as some what “convenience” stores. They charge higher prices, but they are more convenient than Walmart. you can get in and out for a few items in DG or Walgreen’s before you can even have walked from your car to the entrance of the Walmart. But now customers can’t afford the convenience any more and are going back to Walmart. So their customers are feeling the pinch but the door dash users are further up the chain.