Actionable market insights delivered weekly
Stocks Under-appreciate the Impact of Credit Tightening
The market continues to hit a wall in the zone of 4200. And there is good reason for that… Investors are being asked to pay a large risk premium to own stocks. By my calculation – the forward PE is in the realm of 19x. That’s far too high with interest rates at 5.00%; inflation more than twice the Fed’s objective; and a real risk of recession. Today I will also spend a minute on the so-called banking crisis. I prefer to call it a crisis of confidence – as the US banking system is sound. However, we should expect many more regional bank failures – and that will lead to greater credit tightening. That’s a negative for the economy and risk assets.
If the Apple Falls from the Tree… Does the Tree Fall?
Apple managed to beat very low expectations. However, revenue fell for the second consecutive quarter. Nonetheless, the stock was slightly higher on the news. Consider it a safety trade. More broadly, stocks fell today as they wrestled with the threat of more regional bank failures and a committed Fed. Here’s my basic question: will we see three rate cuts before the end of the year? My view is we won’t see a single cut (let alone three). If I’m right (and I may not be) – there will be a painful adjustment in the market.
“One and Done”… Not Yet
The market wanted “one and done”… that was the expectation. Powell spoiled the party. Whilst the market expected a 25 bps Fed hike – what it did not know was whether any hike would be ‘dovish’ or ‘hawkish’? For example, a dovish hike would be something like “we see the end of inflation… we’re winning the fight”. On the other hand, a hawkish tone would be sentiment to the effect of “it’s still premature to make that call”. We heard more of the latter… less of the former.
A Very Narrow Market
Last week all eyes were on large cap tech earnings. They delivered a mixed bag… but on the whole ‘better than feared’. Q1 earnings didn’t fall off a cliff. Single digit growth (top and bottom line) was largely cheered – which highlights how low expectations were. Next week eyes turn to the Fed. The market has priced in a 25 bps hike for May – but will it be a ‘dovish’ hike – where they offer language to suggest a pause in June? Or will they say “there’s more work to do”?