What did you make out of what we saw this week?
There was a lot of back and forth about where inflation's going and therefore
what the Fed's going to do. Yeah, So I think what we saw this week
kind of a continuation of last week is understanding and trying to break down
what are the expectations really for rates in terms of are rates going to be
higher for longer? I think the market is also trying to
assess last week we saw this in terms of the additional the additional supply in
terms of US government debt. We saw what the Bank of Japan did as
well. And so trying to figure out what are the
expectations for both growth and inflation.
And I think there's a little bit of volatility there.
So that I think we'll we'll see some volatility within the month of August.
But in reality, I do think, just given the conservative positioning that we've
seen from investors and a lot of cash on the sidelines, a lot of flows into
T-bills, a lot of flows into money market funds, that ultimately you could
see the market trend higher going into your end.
So what about from your point of view, as in higher for a longer how much
higher and how much longer? So I think, you know, that's where the
disconnect to some degree still exists in terms of market expectations.
Yes, the market has pushed out rate cuts into 2024, but as of now, you're looking
at five cuts being priced in. And under a scenario, even if we
continue with disinflation, where you don't see the kind of cracks in the
labor market, that not that the Fed is is gunning for, but it's certainly in
their forecasts. If the labor market stays tight and you
don't see a hit to growth, it's hard to imagine what the scenario would be under
which the Fed would see a green light for cutting rates versus just staying on
hold. They had Williams out.
New York Fed President Williams out talking about the relationship between
inflation. If it continues to come down and the
fact that growth stays fairly strong and real rates start to rise, that could be
a situation where the Fed says, okay, we're now getting more restrictive than
we would like to be. But I still think that the bias by the
Fed is to stay in pause mode until you get more of a crack in the economy, not
just making a decision based on the trajectory of inflation, if not a crack.
Are we starting to see some at least a loosening of the labor market?
We are. The dip in the unemployment rate
actually was because you did not see an increase in labor force participation.
The payroll number was weaker than expected.
That's the second month in a row. Full time jobs actually declined by
almost 600,000. That that's that's as bad as we have
seen since April of 2020. We all know what was going on there.
We've seen the roll over and temporary help, the big compression down in hours
worked. So you do need to peel the onion back a
little bit to get a sense of where there are cracks in the labor market that
could start to broaden out. And I think direction is always
important. As I always say, you know, better or
worse matters more than good or bad. And it's that direction in payrolls that
I think is worth watching. It doesn't tend to be the case that you
go into negative territory in advance of recessions.
Where are we headed for the rest of the year, would you say, Chris, from what
you see right now, we've had we had a much better first half of the year than
I think most people would have expected. I'm going to keep this up.
Well, I think that the one thing that the first half of the year did teach us
and we talk about this all of the time, is just the dangers of market timing.
And so we started out this year defensively positioned and we were in
the camp that we would see a recession within 2023.
Obviously, the data is something that has has proven really resilient.
I think that would be the word of the first half of the year.
We saw resiliency in terms of employment, we saw resiliency in terms
of earnings. I think when you actually look through,
though, the index doesn't tell the full story.
And so the recession that a lot of people thought was going to occur, where
did we see the recession? Maybe not in the economic data, but we
saw it within earnings. So in Q4 of last year, you had seven out
of 11 sectors already in a profits recession.
The same was true in Q1 and in Q2, it looks like six out of 11 sectors are
going to be in a profits recession. So this concept of a rolling recession
is something that we're seeing within the market, which really begs the case
for diversification. So, listen, you've talked on this
program before about sort of a rolling recession.
You've been talking about it for a while now, sector by sector, not overall for
the economy, but sector by sector. Are we seeing a version of that in
earnings right now? And let me ask you where you think we're
in end up. You know, we have these elss equity
analysts that we look at on Bloomberg, and I think there's still about 4400 for
the median for year end. Does that sound about right to you?
You know, I don't I don't forecast year end price targets for the S&P.
It's not something that we do. I'm just not sure it's a beneficial
exercise for the benefit of what our client base is, which is individual
investors. I will say, though, that the path up
from here probably needs to see a stabilization in the E component of PE
because all of the gain in the market since October has been multiple
expansion. You haven't had any contribution from
earnings. And I think Chris is absolutely right
that you've got to look at the details of what's going on beyond the index
level. That's important in terms of what the
real story is that the market is telling about the macro picture.
It's important in terms of valuation too, particularly the necessity of
taking out the Magnificent Seven or the Great eight or whatever fun word you
want to use to describe what had been a very, very top heavy market, at least
into the beginning of June. And I think the sectoral or rolling
recession thesis is likely to persist, at least in the near term.
And to me, I think the best way to think about best case scenario is not soft
landing versus recession, but a continuation of the roll through whereby
assuming we start to see services get hit, you've got offset offsetting
stability and or maybe recovery in those segments of the economy that already had
their recessions like housing. Housing related manufacturing, even some
areas within the consumer goods side of the economy.
Okay. Let me just.
WEISS One last question, Chris. Have you as thus far the earnings are
coming in better than was expected. How much of that is pricing power?
How much was cutting costs, How much top line?
It is a great question because I think what you what we've seen this this
quarter is when you look at the overall percentage of S&P 500 companies that are
beating earnings expectations, it's north of 70%.
With only 13% completely missing. But when you look at top line revenue,
that's where we're starting to see the impact of disinflation.
That's where we're seeing top line revenue really come down.
So that's only 59% of companies are beating top line revenue estimates,
while close to 22% are missing. And so this idea, what does that mean to
me? That really means that we're in a
slowing growth type environment. So soft landing.
No landing, Hard landing. What I do think is going into the second
half of the year, I think earnings expectations are still a little high.
I think we are going to see in a higher interest rate environment, you're going
to see continued pressure, the rolling recession that we discussed.
But I think some of those expectations should probably come down for the second
half.