The stock market has Wall Street on its heels 📈
Discover more from TKer by Sam Ro
The stock market has Wall Street on its heels 📈
Plus a charted review of the macro crosscurrents 🔀
Stocks climbed last week with the S&P 500 jumping 2.4% to close at 4,505.42. The index is now up 17.3% year to date, up 26% from its October 12 closing low of 3,577.03, and down 6% from its January 3, 2022 record closing high of 4,796.56.
Before dipping slightly on Friday, the S&P closed Thursday at 4,510.04, the highest level since April 2022.
It’s worth noting the S&P is now above all the year-end targets Wall Street forecasters had coming into the year.
This speaks to how difficult it is to predict short-term moves in the market when the most well-resourced, full-time professionals at the highest tier of the industry find themselves on their heels. (Almost all of these strategists have updated their targets over the past two months.)
What’s been driving the rally?
Well, resilient economic growth and the improving outlook for activity helps.
Cooling inflation and a Federal Reserve that’s getting less hawkish also helps.
Importantly, the improving outlook for earnings certainly helps.
For more on earnings, read: The simplest explanation for why stocks are up 📈
“If earnings recover as the consensus expects, and if we do get a soft landing, then it's possible stocks could be on the road to new highs,” Jurrien Timmer, director of global macro at Fidelity, wrote on Wednesday.
“Currently, the consensus estimate is that S&P earnings will contract by 9% in the second quarter and then bottom in the third quarter of this year, before recovering in 2024,” he added. “If that is correct, then the rise in stocks and increase in P/Es that we have seen since last October could be justified and could continue.“
Indeed, we are in the midst of a widely anticipated mild earnings recession. But as stocks are wont to do, they appear to be pricing in the future more so than the present or past.
Nevertheless, the sentiment among Wall Street’s stock market forecasters is anything but frothy.
Even though many Wall Street strategists have revised up their 2023 targets for the S&P 500, many expect the index to end lower by the end of the year. According to Bloomberg, the average strategist’s target implies a 6.6% decline in the S&P during the second half of the year.
Who knows what stocks do in the coming months? Maybe they go up. Maybe they go down.
We do know that the outlook for earnings growth in the coming years is bullish. So it wouldn’t be too surprising if stocks end up even higher a year or two from now. This would be consistent with the long history of how earnings trend and how stocks move with those earnings.
The market spends much more time going up than down. If history tells us one thing about the difference between the bulls and the bears, it’s that the bulls are usually right.
By the way… 📈
The S&P closed at 4,438 when TKer launched on October 14, 2021. That means the market is now positive since TKer began publishing.
TKer reaches more than 20,000 subscribers across all 50 states and 154 countries. As of Friday, free and paid subscriptions were at all-time highs. This tells me TKer’s offering — guided by the “10 Truths About the Stock Market 📈” framework — is resonating.
Thank you for your readership! And if you haven’t yet, I’d encourage you to upgrade to a paid subscription! You’d get full-access to TKer’s award-winning content. And importantly, you’d be helping keep the lights on at TKer!
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Related from TKer:
Still waiting for that recession people have been worried about 🕰️
A big misconception about the Fed's fight to bring down inflation 🙃
Don't expect average returns in the stock market this year 📊
Reviewing the macro crosscurrents 🔀
There were a few notable data points and macroeconomic developments from last week to consider:
🇺🇸 The state of the economy according to the top banker. From JPMorgan CEO Jamie Dimon: “The U.S. economy continues to be resilient. Consumer balance sheets remain healthy, and consumers are spending, albeit a little more slowly. Labor markets have softened somewhat, but job growth remains strong. That being said, there are still salient risks in the immediate view — many of which I have written about over the past year. Consumers are slowly using up their cash buffers, core inflation has been stubbornly high (increasing the risk that interest rates go higher, and stay higher for longer), quantitative tightening of this scale has never occurred, fiscal deficits are large, and the war in Ukraine continues, which in addition to the huge humanitarian crisis for Ukrainians, has large potential effects on geopolitics and the global economy.”
None of this is news to TKer subscribers. For more, read: Don't underestimate the American consumer 🛍️, The good kind of deteriorating labor market 👍, Fed researchers say excess savings have been depleted 🤯, A few thoughts on Ukraine, and Three massive forces have fueled the economic expansion 💪
🎶 Taylor Swift’s economic impact gets the attention of the Fed. The Federal Reserve’s July Beige Book of economic anecdotes concluded: “Overall economic activity increased slightly since late May.“ It also observed something interesting in the Philadelphia area: “Despite the slowing recovery in tourism in the region overall, one contact highlighted that May was the strongest month for hotel revenue in Philadelphia since the onset of the pandemic, in large part due to an influx of guests for the Taylor Swift concerts in the city.“
🎈 Inflation cools. The Consumer Price Index (CPI) in June was up 3.0% from a year ago, the lowest level since March 2021. Adjusted for food and energy prices, core CPI was up 4.8%, the lowest since October 2021.
On a month-over-month basis, CPI was up 0.2%. Core CPI was up 0.2%, the lowest level since August 2021.
If you annualize the three-month trend in the monthly figures, CPI is rising at a 2.2% rate and core CPI is climbing at a 3.5% rate.
The bottom line is that while inflation rates have been trending lower, many measures continue to be above the Federal Reserve’s target rate of 2%.
For more on the implications of cooling inflation, read: The bullish 'goldilocks' soft landing scenario that everyone wants 😀
🤷🏻♂️ Consumers’ outlook for inflation eases. From the New York Fed’s June Survey of Consumer Expectations: “Median inflation expectations declined for the third consecutive month at the one-year-ahead horizon from 4.1% in May to 3.8% in June, the lowest reading since April 2021. The measure has now fallen by 3 percentage points from its series high in June 2022. The decline is broad based across demographic groups. In contrast, median inflation expectations remained unchanged at 3.0% at the three-year-ahead horizon and increased by 0.3 percentage point to 3.0% at the five-year-ahead horizon, the highest reading since March 2022.“
For more on cooling inflation expectations, read: The bullish 'goldilocks' soft landing scenario that everyone wants 😀
📉 Online prices are falling. From Bloomberg: “Prices of goods sold online fell 2.6% in June from a year earlier, according to data from Adobe Inc. released Tuesday. It was the biggest drop since May 2020, and the 10th straight month in which there’s been a year-on-year decline. More than half of the 18 main categories tracked by Adobe showed prices falling on an annual basis.“
👍 Wage growth is outpacing inflation. From Axios: “Real average hourly earnings are up 1.2% in the 12 months ended in June, the Labor Department said Wednesday following the release of the latest inflation data. It had ticked higher in May, but before that had been in negative territory for nearly two years, as workers' raises were not enough to keep up with sky-high inflation. For production and nonsupervisory workers, that number was even stronger, with a 2.2% year-over-year gain in real average hourly earnings.“
For more on why the Fed is concerned about high wage growth, read: The complicated mess of the markets and economy, explained 🧩
💳 Consumers are spending. Here’s Renaissance Macro Research on BEA data: “Auto sales are likely to pick-up in July, but on top of this, weekly data on consumer spending based on payment card transactions are running strong. For the week July 4, spending ran +14.9% against the pre-pandemic baseline. The four-week moving average has been steady, ~10%.“
For more on the resilience of the consumer, read: Don't underestimate the American consumer 🛍️
💼 Unemployment claims tick down. Initial claims for unemployment benefits fell to 237,000 during the week ending July 8, down from 248,000 the week prior. While this is up from the September low of 182,000, it continues to trend at levels associated with economic growth.
For more on the labor market, read: The labor market is simultaneously hot 🔥, cooling 🧊, and kinda problematic 😵💫
👍 Consumer sentiment jumps. From the University of Michigan’s July Survey of Consumers: “Consumer sentiment rose for the second straight month, soaring 13% above June and reaching its most favorable reading since September 2021. All components of the index improved considerably, led by a 19% surge in long-term business conditions and 16% increase in short-run business conditions. Overall, sentiment climbed for all demographic groups except for lower-income consumers. The sharp rise in sentiment was largely attributable to the continued slowdown in inflation along with stability in labor markets.“
👍 Small business sentiment ticks up. The NFIB’s Small Business Optimism Index (via Notes) improved in June.
A key driver of the uptick in optimism was the improved outlook toward the economy. From the NFIB: “It does look like the economy is slowing down, but “data” are not recessionary – except for the leading indicators which continue to get more negative. So where is the recession hiding? Housing seems to have bottomed and is moving up modestly, consumer spending is flat but not headed for the exits, credit statistics are flashing some problems but not critical, there are some large city real estate problems, but not widespread…“
For more on this narrative, read: Attitudes toward the economy have shifted 💥
As the NFIB shows, the more tangible “hard” components of the index have held up much better than the more sentiment-oriented “soft” components.
Keep in mind that during times of stress, soft data tends to be more exaggerated than actual hard data.
For more on this, read: What businesses do > what businesses say 🙊
📈 Inventory levels are up. According to Census Bureau data released Tuesday, wholesale inventories stood at $913.7 billion in May. The inventories/sales ratio was 1.41, up significantly from 1.30 the previous year.
For more on supply chains and inventory levels, read: We can stop calling it a supply chain crisis ⛓
📈 Near-term GDP growth estimates remain positive. The Atlanta Fed’s GDPNow model sees real GDP growth climbing at a 2.3% rate in Q2. While the model’s estimate is off its high, it’s nevertheless very positive and up from its initial estimate of 1.7% growth as of April 28.
For more on the forces bolstering economic growth, read: 9 reasons to be optimistic about the economy and markets 💪
Putting it all together 🤔
We continue to get evidence that we could see a bullish “Goldilocks” soft landing scenario where inflation cools to manageable levels without the economy having to sink into recession.
The Federal Reserve recently adopted a less hawkish tone, acknowledging on February 1 that “for the first time that the disinflationary process has started.“ On May 3, the Fed signaled that the end of interest rate hikes may be here. And at its June 14 policy meeting, it kept rates unchanged, ending a streak of 10 consecutive rate hikes.
In any case, inflation still has to come down more before the Fed is comfortable with price levels. So we should expect the central bank to keep monetary policy tight, which means we should be prepared for tight financial conditions (e.g. higher interest rates, tighter lending standards, and lower stock valuations) to linger.
All of this means monetary policy will be unfriendly to markets for the time being, and the risk the economy sinks into a recession will be relatively elevated.
At the same time, we also know that stocks are discounting mechanisms, meaning that prices will have bottomed before the Fed signals a major dovish turn in monetary policy.
Also, it’s important to remember that while recession risks may be elevated, consumers are coming from a very strong financial position. Unemployed people are getting jobs. Those with jobs are getting raises. And many still have excess savings to tap into. Indeed, strong spending data confirms this financial resilience. So it’s too early to sound the alarm from a consumption perspective.
At this point, any downturn is unlikely to turn into economic calamity given that the financial health of consumers and businesses remains very strong.
And as always, long-term investors should remember that recessions and bear markets are just part of the deal when you enter the stock market with the aim of generating long-term returns. While markets have had a pretty rough couple of years, the long-run outlook for stocks remains positive.
For more on how the macro story is evolving, check out the the previous TKer macro crosscurrents »
TKer’s best insights about the stock market 📈
Here’s a roundup of some of TKer’s most talked-about paid and free newsletters about the stock market. All of the headlines are hyperlinked to the archived pieces.
10 truths about the stock market 📈
The stock market can be an intimidating place: It’s real money on the line, there’s an overwhelming amount of information, and people have lost fortunes in it very quickly. But it’s also a place where thoughtful investors have long accumulated a lot of wealth. The primary difference between those two outlooks is related to misconceptions about the stock market that can lead people to make poor investment decisions.
The makeup of the S&P 500 is constantly changing 🔀
Passive investing is a concept usually associated with buying and holding a fund that tracks an index. And no passive investment strategy has attracted as much attention as buying an S&P 500 index fund. However, the S&P 500 — an index of 500 of the largest U.S. companies — is anything but a static set of 500 stocks.
The key driver of stock prices: Earnings💰
For investors, anything you can ever learn about a company matters only if it also tells you something about earnings. That’s because long-term moves in a stock can ultimately be explained by the underlying company’s earnings, expectations for earnings, and uncertainty about those expectations for earnings. Over time, the relationship between stock prices and earnings have a very tight statistical relationship.
Stomach-churning stock market sell-offs are normal🎢
Investors should always be mentally prepared for some big sell-offs in the stock market. It’s part of the deal when you invest in an asset class that is sensitive to the constant flow of good and bad news. Since 1950, the S&P 500 has seen an average annual max drawdown (i.e., the biggest intra-year sell-off) of 14%.
How stocks performed when the yield curve inverted ⚠️
There’ve been lots of talk about the “yield curve inversion,” with media outlets playing up that this bond market phenomenon may be signaling a recession. Admittedly, yield curve inversions have a pretty good track record of being followed by recessions, and recessions usually come with significant market sell-offs. But experts also caution against concluding that inverted yield curves are bulletproof leading indicators.
How the stock market performed around recessions 📉📈
Every recession in history was different. And the range of stock performance around them varied greatly. There are two things worth noting. First, recessions have always been accompanied by a significant drawdown in stock prices. Second, the stock market bottomed and inflected upward long before recessions ended.
In the stock market, time pays ⏳
Since 1928, the S&P 500 generated a positive total return more than 89% of the time over all five-year periods. Those are pretty good odds. When you extend the timeframe to 20 years, you’ll see that there’s never been a period where the S&P 500 didn’t generate a positive return.
When the Fed-sponsored market beatings could end 📈
At some point in the future, we’ll learn a new bull market in stocks has begun. Before we can get there, the Federal Reserve will likely have to take its foot off the neck of financial markets. If history is a guide, then the market should bottom weeks or months before we get that signal from the Fed.
What a strong dollar means for stocks 👑
While a strong dollar may be great news for Americans vacationing abroad and U.S. businesses importing goods from overseas, it’s a headwind for multinational U.S.-based corporations doing business in non-U.S. markets.
Economy ≠ Stock Market 🤷♂️
The stock market sorta reflects the economy. But also, not really. The S&P 500 is more about the manufacture and sale of goods. U.S. GDP is more about providing services.
Stanley Druckenmiller's No. 1 piece of advice for novice investors 🧐
…you don't want to buy them when earnings are great, because what are they doing when their earnings are great? They go out and expand capacity. Three or four years later, there's overcapacity and they're losing money. What about when they're losing money? Well, then they’ve stopped building capacity. So three or four years later, capacity will have shrunk and their profit margins will be way up. So, you always have to sort of imagine the world the way it's going to be in 18 to 24 months as opposed to now. If you buy it now, you're buying into every single fad every single moment. Whereas if you envision the future, you're trying to imagine how that might be reflected differently in security prices.
Peter Lynch made a remarkably prescient market observation in 1994 🎯
Some event will come out of left field, and the market will go down, or the market will go up. Volatility will occur. Markets will continue to have these ups and downs. … Basic corporate profits have grown about 8% a year historically. So, corporate profits double about every nine years. The stock market ought to double about every nine years… The next 500 points, the next 600 points — I don’t know which way they’ll go… They’ll double again in eight or nine years after that. Because profits go up 8% a year, and stocks will follow. That's all there is to it.
Warren Buffett's 'fourth law of motion' 📉
Long ago, Sir Isaac Newton gave us three laws of motion, which were the work of genius. But Sir Isaac’s talents didn’t extend to investing: He lost a bundle in the South Sea Bubble, explaining later, “I can calculate the movement of the stars, but not the madness of men.” If he had not been traumatized by this loss, Sir Isaac might well have gone on to discover the Fourth Law of Motion: For investors as a whole, returns decrease as motion increases.
The sobering stats behind 'past performance is no guarantee of future results' 📊
S&P Dow Jones Indices found that funds beat their benchmark in a given year are rarely able to continue outperforming in subsequent years. For example, 318 large-cap equity funds were in the top half of performance in 2020. Of those funds, 39% came in the top half again in 2021, and just 5% were able to extend that streak through 2022. If you set the bar even higher and consider those in the top quartile of performance, just 7% of 156 large-cap funds remained in the top quartile in 2021. No large-cap funds were able to stay in the top quartile for the three consecutive years ending in 2022.
The odds are stacked against stock pickers 🎲
Picking stocks in an attempt to beat market averages is an incredibly challenging and sometimes money-losing effort. In fact, most professional stock pickers aren’t able to do this on a consistent basis. One of the reasons for this is that most stocks don’t deliver above-average returns. According to S&P Dow Jones Indices, only 24% of the stocks in the S&P 500 outperformed the average stock’s return from 2000 to 2022. Over this period, the average return on an S&P 500 stock was 390%, while the median stock rose by just 93%.
In case you missed it, here’s a note I like to include when discussing these one-year targets:
⚠️ It’s incredibly difficult to predict with any accuracy where the stock market will be in a year. In addition to the countless number of variables to consider, there are also the totally unpredictable developments that occur along the way.
Strategists will often revise their targets as new information comes in. In fact, some of the numbers you see above represent revisions from prior forecasts.
For most of y’all, it’s probably ill-advised to overhaul your entire investment strategy based on a one-year stock market forecast.
Nevertheless, it can be fun to follow these targets. It helps you get a sense of the various Wall Street firms’ level of bullishness or bearishness.