[Market Outlook] Reward & Punishment

[Company Logo] Reward & Punishment By Keith Schneider and Donn Goodman Another wild week and fast moves in the stock market indices as we are in the middle of earnings season. This past week some of the largest stocks, including Google, Amazon, Qualcomm, Exxon Mobil, Visa, Comcast, Bank of America, Morgan Stanley Snap, and Nike are a few that reported an earnings beat. [image] Most not only increased revenue on the top line but had significant net earnings per share beats on the bottom line and rosy guidance going forward. There were also quite a few disappointments, including Meta (Facebook), Honeywell, McDonalds, Ford, Bed Bath & Beyond, Pitney Bowes, Kellogg’s, Clorox, Walgreens, Adobe, Salesforce, and JP Morgan. Interestingly, the National Media did not care to comment on all the positive beats but instead decided to highlight the largest one-day loss of approximately $230 billion in Meta (FB) stock, a historical first. Similar industry stalwarts reported vastly different earnings (Bank of America & JP Morgan or Facebook & Snap). What gives? Most of the companies with earnings disappointment cited a few meaningful reasons summed up in two areas: supply chain disruptions and increasing labor costs (wage inflation). A Ruthless Market So why such large rewards (GOOG, AMZN to name two) for earnings beats and why such decimation (FB, F to name two losers). We have mentioned it in our previous Market Outlooks, that the market dynamics began changing in the 4th quarter, 2021. There has been much sector rotation and leadership changing in the markets. Most of this is due to a number of factors including a) rising inflation which has spawned rising labor costs; b) rising raw material costs making the output of products more expensive; c) global supply chain interruptions; d) rising energy costs which factor into rising production expenses; e) remaining covid infections and a disruption of human capital available to work; f) geopolitical turmoil and tension causing business anxiety and enhanced cyber security risk; g) rising interest rates; h) recalculation of multiples assigned to stocks. Another contributing factor is money flows. There is still a tremendous amount of investor capital including retirement funds deeply entrenched in the stock market. However, as an indication to the fragility of the market, this past Monday (January 31) the $407 billion SPY ETF saw its biggest redemption since launching in 1993 according to data compiled by Bloomberg. Approximately $7 billion exited Monday alone, the largest daily outflow in 4 years. The January exit was not contained to the S&P 500 fund. The $191 billion QQQ ETF (which follows the NASDAQ 100 of tech names) posted its largest exodus since the dot-com collapse (2000-2002) as about $6.2 billion departed the ETF during the month. All of this enhances the frailty and liquidity of the stock markets and its components. In fact, the amount of money to move key US stock indexes 1% is extremely low. [image] When US Treasuries rates are exceptionally low (negative real returns for investors after accounting for inflation), investors reward the high Price to Sales and Price to Earnings stocks and expand multiples even further, a self-reinforcing dilemma …until the easy money stops. This environment is shifting and the end of a 40-year cycle of lower rates supporting highly speculative tech companies might be finished for quite some time. Hence Growth Stocks (VUG) are underperforming Value (VTV) this year, reversing a decade long plus trend. Do not get me wrong here as there could be some serious rallies that can fool one into believing growth is still the right play. This type of market causes “impatience” and quality consistent long-term earnings begin to be blessed by the market and investor punish the ones that disappoint. Such is this earnings season. What Might We Recommend Now? (Break for click thru) Surprisingly even though we are getting plenty of companies disappointing on earnings, there are enough earnings surprises and beats that it will prop up the market and keep a floor underneath. Our own Mish, in several recent National TV appearances, believes that we are caught in a trading range that could expand and last for some time. The S&P 500 could be building a solid floor (4200) and a hard to break through ceiling (4700) and we may find ourselves oscillating between these two numbers for a while until there is some catalyst one way or the other to break through these ranges. We continue to urge you, our valuable and loyal subscribers, to stay in touch closely. Watch the Risk Gauges, monitor the investment models closely and be attentive to the frequent changes we are initiating. Be ready to shift perspectives quickly. If you are a follower to Mish or our ETF Complete, you may have noticed the exposure to energy and agricultural commodities. Do not get too wrapped up in, and be very selective, in technology issues or small-cap stocks which right now are in bear phases. For this week's market highlights in text and video format, and crypto market highlights, click your appropriate membership level below... 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