Out of the companies in the SPX500 (the Standard and Poor’s 500, a stock market index that tracks the performance of the 500 largest companies listed on stock exchanges in the United States), 66% have reported earnings.
As expected, positive surprises on earnings thus far have been lower in Q4 of 2021, coming down to about 76%, compared to 82% the prior quarter.
That said, it’s important to remember that Q4 of 2020 ended with a similar percentage of positive earnings surprises, at roughly 78%.
When taking a closer look at this large basket of data, we see a few clear winners: Retailing, Telecommunication Services, Household & Personal Products, and Technology Hardware & Equipment.
As traders, it is our job to to mitigate risk while forecasting what the market holds for us going forward.
On the surface, we have a number of risk factors creating uncertainty:
– Increased tension between Russia and Ukraine
– The looming Fed rate hike(s)
– High inflation (typically good for markets, but it does limit consumer spending)
– Tech bill woes
– Lower growth expectations
– Lingering COVID-19 concerns
It’s important to analyze each risk individually.
My analysis leads me to believe that U.S. will be sufficiently isolated from the tension between Russia and Ukraine; Biden has already said that he will not send troops out to fight.
Inflation is a more pressing matter. A few months ago, I mentioned that the biggest concern regarding inflation was the possibility of entering stagflation. This remains a concern and will need to be continually monitored.
The good news is that BLS (U.S. Bureau of Labor Statistics) offers the data that breaks down the CPI components. They also offer city averages from various metropolitan areas. It will important for us to keep a close eye on the data from key hubs.
Several excerpts of note on CPI follow:
Although inflation is a primary point of concern that everyone talks about, I believe we will see a quick drop there as soon as the supply chain issues are fixed.
Going over the major economic data sets, it is clear that we are still supported by a strong workforce and a steady balance sheet reduction, giving the feds some headroom to maneuver.
From the main surveys conducted by various investment banks, we can see that analysts are predicting a wide range for imports.
The supply chain bottleneck in the U.S. seem to have calmed down a bit, but Europe and Asia are still in crisis management mode. This is visualized below:
Here is where things get interesting, and where most people aren’t looking. In the next picture, I’ve plotted bulk carriers and dry cargo together, with a destination bound for North America.
When randomly selecting ships at the majors port, you will notice that things are getting moving again.
In fact, some ships are making a round trip at the average pre-crisis pace.
Now, you might be like, “Okay, TJ, but the markets are tanking – we are headed for a bear market.”
I still believe that is noise; if the markets were truly crashing, yields, energy, and oil would all crash as well.
An early warning sign would be flashing in the commodities sector. For example, if oil was projected to tank, we would see an influx of refineries shutting down, and production halts across the board.
Given that none of these events have occurred all at once, I believe that the latest market panic has been just that: a temporary wave of panic. In the meantime, as these waves continue to subside, stay the course, trust the data, and keep swinging forward.