Today, CAPIS held its June research briefing, featuring Nicholas Colas and Jessica Rabe, Co-Founders of DataTrek Research. DataTrek is a New York-based independent research advisory service providing unbiased data analysis, helping investors make the investment process more profitable, robust, and efficient.
Click here for a video of the research call
Colas and Rabe’s presentation addressed the following topics:
Inflation Is Top Priority for FOMC (4:45)
- Colas opened by saying Chairman Powell and FOMC are committed to taming inflation and they have gone into “hyperdrive. ” The current market environment resembles the 1970s when inflation and rising oil prices rocked and roiled the US economy. (5:00)
- The strong labor markets and consumer spending are issues to watch and understand as the FOMC steers the economy towards recession to combat inflationary pressures. (6:40)
- Atlanta Fed GDP model points to a negative trend through Q2, Q1 is currently at 2 and could post a negative indicator signaling a “technical recession. (7:21)
Wall Street Earnings Expectations are Too High (7:54)
- Colas said Wall Street has not reduced its lofty earnings expectations yet. This is unrealistic as current valuations ($54 per share) show the S&P 500 cannot achieve $60 per share projected but rather closer to $36.72 per share – assuming flat earnings, cost management and a hiring freeze for the rest of the year. (8:12)
- If earnings are flat for the remainder of 2022 that would classify the year as “not bad.” A realistic assumption is for a 25% drop in corporate earnings or S&P level of $30.78 per share. (10:12)
- The bad news for stocks is not fully priced in just yet. And the current market dynamic can best be described as “fragile.” (12:30)
- The Federal Reserve Chairman Powell is worried about the markets and wants all to anticipate a recession. (12:50)
- The S&P 500 could bottom in the fourth quarter and that would be a suitable entry point to buy equities and find compelling values. (14:45)
Equity Volatility Equals and Could Surpass “dot.com” and “Financial Crisis” Periods (15:33)
- We are currently at peak volatility moments when compared to the dot.com bubble in 2002 and the subprime crisis of 2007. Using a benchmark measurement of a 1 standard deviation move in the price of the S&P from close to close for a single day (ie: price volatility,) 2022 has been 59 days. In comparison, 2021 saw a total of 55 days and the 2002 dot.com period saw 180 days. Expect 2022 to resemble these two significant market moments. (16:00)
- During both the 2002 dot.com bubble and 2007-2009 subprime/financial crisis, volatility peaked, and the equity markets bottomed after either a fiscal stimulus package or geopolitical event resolution. This might be required to cap volatility and help the market find stability. (17:15)
- The market is really in a tough spot. (20:20)
- Markets need a macro change in policy. (21:30)
Global Fixed Income (22:56)
- Fixed income markets are subject to the whims of global inflation – not just US inflation. Oil and food prices are rising on a global level and only a recession can help tame prices. (23:07)
- Despite some concern, the euro remains solid (though at the lows) as the ECB is actively managing the currency. Also, Italian bond yields are DataTrek’s preferred proxy for the health of the global fixed income markets and bear scrutiny. (24:00)
- When looking at precious metals, markets can expect widening spreads between gold and silver as the global recession will dampen demand for silver due to its industrial applications. August has historically been a strong month for gold prices. Gold has historically been a storehouse of value and will continue to be such. (25:15)
- Municipal bonds are being sold aggressively as evidenced by monthly Municipal fund outflows of upwards of $57 billion per month. This flies in the face of the historical norm of $10 billion in inflows per month during similar moments. (27:10)
Stormy Weather Ahead (29:20)
- Markets are very hard to handicap and the FOMC was forced to leak its June interest rate movement. If the US CPI hits 9% then 100 bps hikes could be on the table. (30:00)
- FOMC will front-load interest rate hikes to reinforce its intent to crush inflation. (31:00)
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