The Week Ahead: The Complexity of the Markets Has Never Been Clearer

Lenore Hawkins  00:23

So this week, very different week from last week, wasn't it? So last week of January, whoa, I mean, you saw the Dow and the New York Stock Exchange composite all closed below their 50 day moving average. All of the major indices fell more than 3% on the week and had their worst week since October. That all change this past week. They had their best week since November. Now. Now why was that?

Chris Versace  00:52

Well, I think it was, wasn't it because Elan musk started tweeting again, could be good.

Lenore Hawkins  00:58

But what was really going on the markets are looking at the decline in the virus counts. There are expectations for a speedier vaccine rollout getting a little bit more positive about that. There's expectations for some massive government stimulus. We'll talk a little bit about that today about what the real impact of that is going to be expectations for continued loose monetary policy. And so far, earnings have been a lot stronger than expected. In fact, we're halfway through earnings season and about 80% of the companies that have reported so far have beaten their estimates, which Okay, that sounds great, right. 80% have beat me estimates. Fantastic, except the earnings estimates for this quarter that's currently being reported, are now $39.54 for the s&p 500. That's up a lot from the $36.50. That was expected at the end of 2009. But that number is way below what was expected in 2019. That was $46. So right now earnings are 14% below what they are projected to be a year ago, and the s&p is 20%. Higher. And if you go back two years to see what expectations were for this current quarter being reported, they're 24%. Below that, and yet the s&p is 54%, higher. So we're paying a lot more for a lot less,

Chris Versace  02:22

You make it sound like there's a big disconnect ...

Lenore Hawkins  02:25

Ever so slightly, in fact that the market now is trading at nearly 20 times the 2022 earnings. And all of that is hinging on expectations for ETS growth of more than 15% by 2022. Wow. But not that that is outside what we normally see, to put it mildly. And in fact, if you look at what's been doing really well in the market, the most shorted stocks have really outperformed this year by about 25 percentage points. And if you look at the aggregate market cap of all the stocks that make either no money, or they're losing money that has tripled since the march lows, and that's about six times the pace of the rest of the market. So what's really performing the best is garbage.

Chris Versace  03:05

Thank you, Robin Hood. So let's talk about the economic data. What caught your eye last week, and what are you looking for in the coming week?

Lenore Hawkins  03:15

What we just got this morning, we got the jobless reports we got a lot of jobs data. So the jobless claims on Thursday, a lot of people happy they came in better than expected. But if you look at the challenger data on layoffs, layoffs are at the highest level for any January since 2009. That's not a great sign. And the number of layoffs that are due to a downturn in demand has soared 26 times the past 26 times the past year. And the share of total layoffs has just hit an all time high. The number of new hirings has fallen to an eight month low in January. So that's not really painting a particularly good picture. Then if you look at the Friday's job report, well, incomes are strong, the workweek rose to a record high 35 hours. So that's great. But the bad is that job growth came in a lot weaker than expected. 49,000 jobs were added versus 105 expected, so less than half. And if you look at the diffusion metrics, they plunged from 61.9% in December to 48.1. That's the lowest reading we've seen since April, which means that more than half of the private sector industry shed jobs in January. And even worse, the two prior months of jobs were revised down a total of 159,000. And those declines were pretty fairly broad across all sectors of the economy. state and local governments did hire back about 67,000, which ended a four month streak of declines. But that means that if you look take those jobs out, right because the private the public sector, that's not really adding to GDP, right because that's, that's tax dollars paying for that. If you take them out, that means Wait a minute, wait a minute.

Chris Versace  04:57

Are you making a dig at government employees?

Lenore Hawkins  04:59

No, just Look at just the just the numbers, right? public sector where the money comes from the public sector that comes out of either taxes or borrowing to pay the public sector, the private sector Actually, that's where the economy, right, that's what generates economy that lost 18,000 jobs. So overall, not a great picture.

Chris Versace  05:20

We're also seeing some other things that are kind of creeping up in the data from last week and the one that jumps out of me and we heard this from some companies as well. It really speaks to supply chain constraints and potential inflationary pressures that are brewing. You know, we've heard from the auto companies can't get parts can't get chips. there as a result there idling some lines in their production facilities. Even Qualcomm whose growth Rose 63% year over year in the December quarter, largely on the 5g ramp of smartphones, said could have been better, but supply constraints and that that starts to get me kind of a little worried about that. And there's some great a great quote by Chris Williamson, he's the Chief Business economist over at IHS market. We look at his data all the time. He said this in the January us manufacturing excuse me manufacturing PMI report. Again, direct quote, manufacturers are encountering major supply supply problems, however, especially in relation to sourcing inputs from overseas to what a lack of shipping capacity lead times are lengthening to an extent not previously seen in the survey's history, meaning costs are rising as firms struggle to source sufficient quantities of inputs to meet production needs. And then in the SR report, the January us services PMI Williamson also noted that rising costs have fed through to higher prices charged for goods and services, which rose in January at a rate not seen since at least 2009. Inflation he says looks likely to be pushed higher in the near term.

Lenore Hawkins  06:52

Now even we heard from peloton this week as well. peloton is incurring costs that are about their shipping costs are going to be about 100 times what they normally are supposed to be, they had to send an email out to everyone apologizing for the long delays. We're hearing this across the board. We're hearing this out of Italy, a lot of the furniture manufacturers are saying they're having a really tough time. sourcing raw materials and logistics overall with shipping is just become a real nightmare. So I understand your concern with inflationary pressures. But we have to kind of narrow that down when we're talking about inflation. What do we really mean? inflation for me is not really a spike a transitory spiking costs because we're kind of putting the pig through the snake right now, right? Everything had to come crashing down with the pandemic and lock downs, and nothing was moving. And now we're trying to get everything moving really fast and get it going again, and that's not going to go smoothly, right. This isn't a car that you can just turn on and off. So while we're seeing some transitory spikes, if you take a step back and look at the bigger picture of how do we really get this inflation going? Well, even the jobs report this Friday, gave us indications that there's now a lot of possibility their average hourly earnings were weaker than expected growth rose just point 2% versus point three, that's really not inflationary. And what else we're seeing is that while and two, so the money supply defined by MTM has grown about 25%, over the past year, the velocity of money has paunch. So that means that money that's going into the economy is really coming out very quickly, just going into savings. banks aren't lending because borrowers aren't really borrowing that much, because everybody's still nervous. And we're continuing to see the savings rate ticking up. So as long as that velocity and the velocity money really talks about the number of transactions as long as people are really hunkering down and they're not spending tough to get that inflation going. And let's not forget the massive amount of debt all across the corporate sector and the public sector, that's really a big anchor on getting things going to hot.

Chris Versace  08:53

That's certainly all true. That's all true. I think as we go through the bounce of the earnings season, though, myself and a bunch of others are going to keep their ears to the earnings reports as it were listening for similar comments. And it likely means watching producer price indices to see what happens. We don't know necessarily if these companies will able to pass along these price increases something to watch. But in the near term of the PPI reports and the other PMI data that we'll be getting for February, March and stuff, all those under the headline line items will be rather insightful and ticking through all of this information.

Lenore Hawkins  09:28

But next week, we get the CPI report so that'll be useful.

Chris Versace  09:32

That'll be useful. I think, you know, what's interesting to me is after such a stay luge of data this week we there's really not much next week on ...

Lenore Hawkins  09:40

That next week's gonna be a nice little break. The earnings are still going up, right. We don't have as much quite as much On the economic front, which will be nice.

Chris Versace  09:48

Yeah, that's right. So so just let's segue over to the earnings like we were saying earlier, about 59% of the s&p 500 is reported this past week alone, about 20%. And yet better than expected This has led to an upward revision in 2021 consensus ups for the s&p 500, about two weeks ago 169 59. And now about 170 205. in dollar terms, yes, that's a modest increase, we acknowledge that. But it does take the expected DPS growth over the 2019 to 2021 period to about five and a half percent. And that's up from pre to previously about 3.9. So moving in the right direction, better, not robust. And much of that hinges on the expected rebound in the second half of 2021. So one of the criticisms of the market and heck we've made it ourselves is that valuation metrics, especially the market PE had gotten rather stretched, and to see a sustained upward move in the market, we would need more IE in the PE, we would need that to move higher. In other words, we're starting to see it. The question is, will it continue to happen? We'll be talking about that with you in the coming weeks. Next week, though, you know, we're gonna see if this trend continues, we've got about 640 companies reporting next week, 90 more s&p 500 companies. What this means is before we get out of here for presidents weekend, long weekend market closed on Presidents Day, about 77% of the s&p 500 will have reported we'll get a real better sense as to how 2021 ups for both the march quarter and for all the full year are kind of you know, coloring in between the lines, if you will, how firms they are. So what's on tap this week, from a thematic perspective, we've got cybersecurity Cisco Systems cyber Ark and cloudfare going to report what was the fallout from the solar winds debacle at the end of the year as well as are they seeing that robust year over year growth as a result of the pandemic flavor. We have both international flavors and fragrances and sentiment reporting over the next couple of days. We know there's a continued shift to organic natural flavors. Let's see what they have to say. I suspect that business is going to be a barnburner for them. We get a lot of economic data that we tend to chew through but it's always nice to hear what companies have to say with that regard. What to MGM resorts Nu Skin and to some extent Coca Cola have to say about the economy in China on the ride sharing front, Uber and Lyft. These are going to be interesting reports. One are people hoovering and lifting around more. That's the first question. But second, what are they going to say about the Biden stimulus package that looks to potentially boost minimum wages in third, especially in the home state of one of us for California? We know those businesses are under attack because of the gig worker issue. So we'll have to see Well, I'm looking forward to hearing what they have to say about that. And then finally on the homebuilding front, we've got Zillow, we've got maska, we've got Redfin, we know inventory and the homebuilding market is getting low. Again, we know prices are going higher. What are these companies seeing? Where do they think it's going to go? And outside those themes just to other companies? I want to mention real quick, Simon properties. This is a read that focuses on malls, why do I want to pay attention to this? What is the state of the mall? What is the state of the consumer? And how bloody is it out there in retail land? And then finally, I'm not saying this because I like the Mandalorian. I'm not saying this because I like one division. Heck, I'm dressed like Batman as I do this. Well, Disney reports. And I want to know what they are seeing, not only for Disney plus subscriptions, potential price hikes there. But when did they think the parks might start to open? When do they think movie production will start to roll again. Those are the big ones for me. And I think outside of the earnings front, the only two other things to really watch both in Washington. One is going to be to see the speed at which Biden's stimulus plan progresses through Congress. And then I know I just talked about Walt Disney in the Big Show and stuff. But one of the biggest shows is going to happen next week in Washington.

Lenore Hawkins  14:05

Fallout to be had from the impeachment trial of President Trump.

Chris Versace  14:09

There we go. That'll that'll be a show. And that is your week ahead.

Douglas Heikkinen  14:14

Great. Thanks so much, Chris and Lenore to do a deeper dive into what they're thinking go to Tematicaresearch.com. To subscribe to the week ahead, go to advisorpedia. com and hit the subscribe button. Thanks so much, everybody. This is Doug Heikkinen

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