[Market Outlook] Dark Clouds Loom Large Over the Markets.

But Investors Hope the Sun (and Profits) Show Up Soon. [Company Logo] Dark Clouds Loom Large Over the Markets. But Investors Hope the Sun (and Profits) Show Up Soon. By Donn Goodman and Keith Schneider [image] However, hope is not a strategy. Welcome to the Outlook Gaugers. Glad you are with us. Thanks for making time to review our thoughts and Big View summaries. Let’s dive in. The market has been extremely quiet these past few weeks. This week the Dow and S&P were down slightly, and the NASDAQ was up a tiny bit. Dark clouds loom on the horizon. Let’s explore each one together. 1. The First Dark Cloud: Corporate Earnings According to Fact Set, 92% of S&P 500 companies have reported their Q1 2023 earnings results with 78% beating their earnings estimates and 75% reporting revenues above estimates. This was 4% better than the 6% decline expected in corporate earnings. Wall Street analysts had modeled all the earnings scenarios and determined that we were already in the middle of a six-month earnings recession. We learned over the past few weeks that their models were correct. This past quarter (Q1) was indeed a struggle for many of America’s biggest companies. That quarter is over. We are in the middle of Q2 and inflation is trending lower (ever slightly, as we will explain shortly). Guidance from the hundreds of conference calls that took place after earnings announcements was far lower than expected. Many of these negative calls resulted in a sudden decline in share prices, even though the company’s earnings may have beaten estimates. No catalyst for growth. What came through from corporate CEOs addressing earnings was that there has been NO miraculous recovery in the past year’s business cycle and trends. If anything, we may get a few unwelcome shocks in the near term, which could saddle the current market malaise a bit longer. Some estimates have the current quarter experiencing a 5% or more earnings decline. Therefore, it is easy for many analysts, portfolio managers and people managing money (including Bank CEOs like Jamie Dimon) to think we are headed for a recession and negative growth for the remainder of 2023. It is also likely why many professional investors and economists are betting on a decline in interest rates in the latter half of the year. After you read the next section on inflation, you may agree with our assessment that interest rates are likely to stay higher for longer. I still do not see the pivot that many market pundits believe will take place (and I have been known to be wrong many times). 2. The Second Dark Cloud: Inflation The Market and Economists May have it Wrong! We think the markets (and analysts) have it WRONG about inflation. We are not alone. Last Wednesday, the Consumer Price Index (“CPI”), the most widely watched inflation indicator, came in at 4.9% (year-over-year) for April. Yes, that is lower than the 5% for March and Yes, that is the 10th straight monthly decline in the annualized rate of inflation. The stock market had a positive reaction to that news. The NASDAQ rose 1% on Wednesday and the S&P 500 was up about 0.5%. Let’s examine further. (I am being ever so picky right now). In March, the CPI did not rise 5% above March 2022, as it was reported. It actually rose 4.9850% above it. And April’s reading wasn’t really 4.9%. It was 4.9303%. The difference between these two readings was really 0.0547% percentage points not 0.1% as reported by the press. By rounding the numbers, the actual difference was reported as twice as large as what really took place. (wait, it gets better). The question remains, did inflation fall in April as was reported or did it stay flat? (You would be right whichever answer you pick). If you look at the chart below, it is plain to see that inflation is falling. [image] After going basically sideways for a couple of decades, inflation broke out to 40-year highs last year. Clearly, it has started to decline and head back down due to the Fed raising interest rates for a historical 10 times. You would be correct if you look at the chart and buy into declining inflation. Looks that way to me. And the trendline of measuring year-over-year points to that evidence. But hold on one second. The CPI rose 0.4% in April, in line with expectations. But wait a minute, the March month over month number was 0.1%. April was 0.4%. Would you say that inflation is falling, staying flat or rising? Look at the chart below: [image] To me it seems that inflation is steadily continuing to rise with a couple of lower months. Those are likely due to energy prices coming down. However, food and rents continue to trend sideways to upward. Therefore, one could easily conclude that inflation remains flat and is not really declining. Core CPI is even more ominous looking. If you look deeper into the numbers at core CPI (which is the CPI number that excludes food and energy prices). Core CPI rose 5.5% in April. The reason they produce the core reading is that food and energy prices are volatile and may have too much influence on the overall inflation picture. If you exclude those parts from CPI the Government believes you get a more accurate view of real inflation. That number remains elevated. Again, inflation has not come down as fast as you are being told by the media. What about the PCE? Anybody who has followed the Fed’s hawkish rhetoric for the past two years knows that the Fed is fixated on the PCE (Personal Consumption Expenditure) and NOT the CPI. When they meet for their periodic Fed policy meetings, they discuss the PCE, not likely the CPI. Let’s look closer at the PCE (the same chart the Fed is looking at): [image] Again, we see the same things as we did for the CPI….a few decades of sideways action and then WHAM, a straight up trajectory in the rate of inflation as illustrated by the PCE. But look closer. After peaking at 5.4%, the last four readings have been steady between 4.6% and 4.7%. That is less than a 1% difference in the monthly PCE numbers. Inflation has been holding steady at around 5% for the better part of 16 months. And that is approximately 3% greater than the Fed’s target level of 2%. In my humblest opinion, what the government wants you to believe (that inflation is subsiding) is a false narrative. The rate of inflation has been manipulated to provide the best possible light. They began to recalculate these numbers a few years ago to avoid using the older, more traditional way that had been used. That calculation would likely have put inflation in double digits and as high as 12-15%. Therefore, the current inflation numbers, in our opinion, are under-reporting the actual pain that most Americans are feeling. I love the chart above that Stansberry just sent out. [image] To us, this likely indicates a prolonged period of keeping interest rates higher to fight sticky inflation. And no pivot anytime soon. The Fed lowering interest rates anytime soon may be wishful thinking. In fact, the Fed may have more work to do, and this is why we continue to say we wouldn’t be surprised to see 1-2 more 0.25% (25 basis point hikes). 3. The Third Cloud: Debt Ceiling Click the links below to continue reading to discover: - How much authorized funding the government has left - The 4th dark cloud - A divergence between two key indexes that has never been wider - The 5th dark cloud - Two sectors that suggest a recession is near - What you should do know to weather this market storm - And more! Plus, get the Big View Summary bullets and video analysis. 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