Month: January 2022

U.S. FLASH PMI

US output growth slows to 18-month low as Omicron wave exacerbates supply delays and labor shortages

US private sector firms signalled a marked slowdown in growth at the start of 2022 amid softer demand conditions, worsening supply chain disruptions and labor shortages linked to the Omicron wave.

Adjusted for seasonal factors, the IHS Markit Flash US Composite PMI Output Index posted 50.8 in January, down notably from 57.0 in December. The resulting upturn in activity was only marginal, and the slowest since July 2020.

The slowdown in output growth was broad-based, with both manufacturing and service sector firms reporting near-stalled output as the steep spike in virus cases associated with the Omicron wave meant ongoing supply issues and labor shortages were exacerbated by renewed pandemic related containment measures.

Although output was constricted by the Omicron wave, demand growth remained more resilient. New orders for goods and services continued to rise strongly, albeit registering the weakest rise since December 2020. The upturn in new orders was supported by the service sector, as manufacturers stated that new sales growth was often held back by weaker demand from clients amid price rises and efforts to work through inventories. Renewed restrictions in key export markets and raw material shortages also led to a softer upturn in new export orders.

Meanwhile, input price inflation softened again in January. The rate of increase in costs was the slowest since last March, albeit sharper than any prior period in the series history. Firms noted that prices were driven up by greater supplier costs and upward pressure on wages. The pace of selling price inflation for goods and services picked up, and was the third-fastest on record (since October 2009) as companies sought to pass higher costs on to clients.

Despite challenging labor market conditions, firms were able to expand their workforce numbers in January. The rise in employment was only modest, however, with backlogs of work increasing solidly again. That said, the upturn in outstanding business was the slowest since March 2021 as some firms noted efforts to clear work-in-hand.

Although the degree of business confidence in the year ahead was the second-highest since last June, optimism waned. Concerns regarding further price rises and client responses to inflationary pressures weighed on expectations.

The seasonally adjusted IHS Markit Flash US Services PMI™ Business Activity Index fell to 50.9 in January, down from 57.6 in December. The expansion in business activity was only marginal overall, slowing notably from the previous survey period. Labor shortages, employee absences and the Omicron wave reportedly weighed on growth.

Demand conditions held relatively firm, however, as new business rose strongly. The rate of growth was the softest for four months, but was broadly in line with the series average. New business from abroad expanded for the third month running.

Input cost inflation slowed in January. The pace of increase was the joint-softest for almost a year despite being marked overall. Nonetheless, the uptick in costs was linked to supplier price hikes and soaring wage bills. Relatively firm demand conditions allowed companies to pass-through some input cost increases, as the rate of charge inflation accelerated to a series high.

Service providers increased their staffing numbers at a modest pace in an effort to relieve pressure on capacity. Although solid, the pace of growth in backlogs of work was the slowest since May 2021.

Business confidence was dampened in January and slipped to a three-month low amid concerns regarding the impact of inflation and the pandemic on demand over the coming months.

The health of the manufacturing sector improved to the least marked extent since October 2020 in January, as highlighted by the IHS Markit Flash US Manufacturing Purchasing Managers’ Index™ (PMI™)posting at 55.0, down from 57.7 in December. Again, the headline figure was supported by a greater deterioration in vendor performance which would ordinarily be a signal of improving operating conditions. That said, supply chain issues abounded, which further hampered production and weighed on client demand.

Output levels were broadly unchanged from those seen in December, as new order growth slowed to the softest rate since July 2020. Alongside labor and material shortages stymieing the upturn, firms noted that customers were keen to reduce spending amid sharp hikes in costs.

The rate of cost inflation eased again in January and was the slowest since May 2021. Although still marked overall, there were signs of pressure waning. Similarly, the pace of charge inflation softened and was the least marked since April 2021.

In line with softer demand conditions, firms signalled slower upturns in input buying and stock building. Rates of growth were the slowest since February and March 2021, respectively.

Labor shortages, a high turnover of staff and reports of the non-replacement of voluntary leavers led to the first decline in manufacturing employment since July 2020. Despite backlogs of work rising again, the expansion was the softest since last February.

Finally, manufacturers bucked the trend and signalled stronger optimism regarding future output in January. Confidence was the highest since November 2020 amid hopes of stable supply flows and a reduction in the impact of COVID-19.

The key stuff:

• “Output levels were broadly unchanged from those seen in December”. From the December PMI: “With the exception of October and November, the pace of output growth was the slowest since October 2020.” That is 4 months of pretty weak growth, if any, in manufacturing production.
• “[Manufacturing] new order growth slowed to the softest rate since July 2020.” From the December PMI: “new orders
  expanded at the softest rate for a year.” Production is weak and new orders are weak. Bad!
• “firms noted that customers were keen to reduce spending amid sharp hikes in costs.” The problem is more than demand, customers need to cut spending because their margins are declining.
• “efforts to work through inventories.” We know these are too high, so the lull will last for a little while.
• Service providers, whose new business rose strongly, talk of soaring wage bills with charge inflation accelerating to a series high. Last month: “soaring wage bills and greater supplier prices led to the steepest increase in cost burdens on record.” Forget Goods inflation. The problem is services prices and wages.
• “the rise in [services] employment was only modest” and January saw the “first decline in manufacturing employment since July 2020”.

Transitory stagflation Mr. Powell? He’s better be right on that if he starts hiking in March.

But will he?

Slow employment growth, reduced hours and rising prices are nothing to boost consumer spending.

“For all the spending of all types through January 17, 2022, we have seen it up over 11% versus the start of ’21, which is well up over ’20 and ’19.” – Bank of America (BAC) CEO Brian Moynihan

Hmmm…Chase’s data is not quite as strong through Jan. 17. At least, it’s not getting worse.

• Chicago Fed National Activity Index Turns Negative in December

The Chicago Fed National Activity Index (CFNAI) dropped to -0.15 during December from 0.44 in November, revised from 0.37. In 2021, the index improved to 0.33 from -0.48 in 2020.

The index’s three-month moving average eased in December to 0.33 from 0.40. During the last 10 years, there has been an 75% correlation between the change in the Chicago Fed Index and quarterly growth in real GDP.

The Personal Consumption & Housing component moved lower to -0.19 from -0.02 in November. The Production & Income component weakened to -0.13 from 0.25 in November. The Employment, Unemployment & Hours component eased to 0.13 from 0.16. The Sales, Orders & Inventories index slipped to 0.03 from 0.05 in November.

The CFNAI diffusion index, which measures the breadth of movement in the component series, fell to 0.37 in December from 0.42 in November. The diffusion index averaged 0.28 in 2021, up from 0.19 in 2020.

Retail investors bought $1.36 bln in stocks on Jan 24 That is the highest level since Jan. 18 when net purchases exceeded $1.6 billion in stocks, according to Vanda, and indicates that retail traders continue to buy on market dips.

Nasdaq Composite’s Wild Swing Precursor to Bounce, History Shows

The Nasdaq Composite Index’s gain on Monday after an intraday plunge of nearly 5% was only the sixth time this century that a swing of that magnitude occurred. Each instance led to a rather sharp recovery within the prevailing downtrend.

Trading data analyzed by Bloomberg shows that in the other five sessions since 2000 that saw the Nasdaq Composite close in the green after reversing a drop exceeding 4%, the decline came to a stall and a sharp rally ensued for a few days to a few weeks. (…)

Excluding the latest occurrence, the Nasdaq Composite was up an average of 3.5% after five days — with the index also higher in all five instances. The mean gain after 20 days widened to 5.2%, with the benchmark higher in four of five cases. (…)

John Authers: Boomerang Rally Hints at Deeper Market Troubles History suggests that such dramatic reversals happen only when something is amiss.

(…) Trading reversals this dramatic are not common. Bespoke Investment Group finds only five prior instances since its records began when the Nasdaq Composite fell as much as 4% intraday and finished in positive territory. Here they are, with Bespoke’s detail on what happened next. (…)

Investors Lose Appetite for Stocks of Unprofitable Companies The prospect of rising interest rates has been especially hard on the Russell 2000 small-cap index, in large part because of the high proportion of small-caps that aren’t making money.

(…) Companies making up 31% of the Russell 2000 were unprofitable as of the end of 2021, according to an analysis from Jefferies of earnings over the previous 12 months. By contrast, 5.7% of the Russell 1000 index of larger firms was made up of companies without earnings. (…) Within the Russell 2000, shares of companies without earnings have fallen further this year than has the index as a whole, according to Mr. DeSanctis. (…)

Chinese state-owned property firms step in to rescue cash-strapped developers

(…) “For sure we will see more of these deals, because the central government has made the order,” said Oscar Choi, founder and CIO of Oscar and Partners Capital Limited. “Large state-owned enterprises will need to respond and act.”

Choi expects SOEs will not go beyond assets and management property business to directly acquire stakes in the distressed developers, as Beijing wants to stop short of direct bailouts and keep only the “meaningful” players in the market.

“Equity investment will be a last resort … (Beijing’s) broad principle is save the market and not individual developers.” (…)

COVID-19

State of Affairs: Jan 24 Katelyn Jetelina

(…) Over the weekend, we reached an important milestone in South Africa—Omicron’s epicenter—as all indicators peaked. We were waiting for deaths to peak, which happened at 20% of Delta’s peak. Today, their test positivity rate is below 10%, indicating that transmission is largely under control for now.

But case patterns across the globe may change soon. That’s because a new sub-variant is taking hold: BA.2. Late last year, Omicron (called BA.1) mutated into a sister lineage. This new version of Omicron has many of the same mutations as BA.1 but has a lot of differences, too. (…) BA.2 has ~85 mutations while BA.1 has ~60 mutations. Usually it takes a while for this many mutations to arise, but it didn’t this time. Could this be due to animal reservoirs? In other words, is this mutation a result of the virus jumping from humans to animals and back to humans? Maybe, we don’t know.

Importantly, BA.2 lacks the spike mutations Δ69-70. This is important, because it means, unlike with BA.1, BA.2 doesn’t have a special signal on PCR tests to tell labs that it is Omicron. All tests now need to go to genetic sequencing for variant identification. This is why the Guardian coined it the “stealth” version of Omicron a month ago.

On Friday, the U.K. labeled BA.2 a “Variant Under Investigation (VUI),” as it’s doubling every 4 days there which equates to a 120% growth advantage over BA.1. VUI is the least severe variant classification, but still a signal that we need to pay attention. BA.2 has already started to take hold in places like India, Philippines, Netherlands, France, and Denmark. (…)

There’s a lot we don’t know about this variant, but we have a few clues so far:

• Transmissibility: The consistency of BA.2 growth across several counties means that it’s more transmissible than BA.1. It’s likely nothing like the huge transmissibility jump we saw from Delta to Omicron, though (500% growth advantage). This means that Omicron waves will likely be drawn out (like we are seeing in Denmark or France). In places like the United States, we may see two peaks for the same wave. This won’t be a massive wave on top of another massive wave, though. It’s still Omicron.

• Severity: Early data from Denmark shows there’s no disease severity difference between BA.1 and BA.2.

• Immunity: There is likely to be minimal differences in vaccine effectiveness in BA.2 compared to BA.1. In other words, our boosters will still work very well. It is also very likely that there will be cross-reactivity: BA.1 infection will protect against BA.2 infection.

We know this virus will mutate. And BA.2 is an example that it’s doing what we expect. We should keep an eye on this, but I’m not too concerned right now. I’m more concerned about another variant popping out of nowhere like Omicron did.

Cases in the United States have largely plateaued at 690,448 cases per day (208 cases per 100,000), with a modest 2% increase over the past 2 weeks. The Northeast has clearly peaked, with cases plummeting in New Jersey (–64% 14-day case change), Washington DC (–61%), New York (–58%), and Maryland (–54%). This is offset by growth in Oklahoma (+196%), Idaho (+174%), Alaska (+164%), and Wyoming (+141%).

Cases by Region, last 90 days (NYT)

As Dr. Trevor Bedford, a brilliant computational epidemiologist and scientist, pointed out, these epidemics across states have proceeded in a strikingly similar fashion and most states seem to be on the same curve. Some are just farther a head on this curve than others. Dr. Bedford estimated that as of January 17, 4.5% of the U.S. population recorded a confirmed case. After accounting for under-reporting, we should expect 36-46% of the U.S. population to have been infected by Omicron by mid-February. This is just astounding for a virus to achieve in a short 8 weeks.

Hospitalizations in the United States have increased 24% over the past two weeks, and we currently have 158,825 people hospitalized. There are preliminary indications that hospitalizations have begun to plateau, though. And hospitalizations continue to be largely among unvaccinated people. In fact, this weekend in New York City hospitalizations among unvaccinated people were literally off the chart.

(New York City)

Thankfully, CDC finally updated their data and, on a national level, the relationship couldn’t be more clear: In December, compared to fully vaccinated persons, the monthly rates of COVID-19-associated hospitalizations were 16 times higher in unvaccinated adults.

Age-Adjusted Rates of COVID-19-Associated Hospitalizations by Vaccination Status in Adults Ages ≥18 Years, January–December 2021 (CDC)

Deaths have increased 41% in the past 2 weeks. For the first time since February 2021, we reported 3,896 COVID19 deaths in the United States. This made last Friday the 10th deadliest day of the whole pandemic and the deadliest since vaccines were widely available to Americans. We are loosing more Americans each day to COVID19 than we did during 9/11. And the biggest tragedy is that COVID19 death is preventable— vaccines reduce the risk of dying by 68 times. Omicron may be milder compared to Delta, but it’s not mild.

(Newsnodes with labels by Jetelina)

Taken together, this probably explains why the majority of Americans see the COVID19 situation as “getting a lot” worse lately.

(Gallup)

Bottom Line: The Omicron wave is peaking across much of the globe, but this may be drawn out due to a new sister mutation called BA.2. As expected, hospitalizations and deaths are closely following. Hang in there, it will get better.

So, South Africa’s deaths are peaking at 20% of Delta’s peak. In the USA:

Data: Our World in Data. Chart: Will Chase/Axios

FLASH PMIs

Eurozone growth slows as Omicron hits services, but manufacturers benefit from easing supply constraints

The headline IHS Markit Eurozone Composite PMI® dropped for a second month running at the start of 2022, down from 53.3 in December to 52.4 in January, according to the ‘flash’ estimate. The latest reading indicates the slowest rate of output growth since the recovery from lockdowns in early 2021 began last March.

However, the slowdown masked wide variations in performance by sector. Service sector output growth slowed sharply for a second month running, dropping to its lowest since last April, amid soaring COVID-19 infection rates. The rapid spread of the Omicron variant led to the reimposition of many measures to contain the virus in recent weeks, notably in Germany, France, Italy and Spain, which adversely affected consumer- and hospitality-oriented businesses in particular. According to IHS Markit’s COVID-19 Containment Index, restrictions in January have risen to their tightest since May of last year across the eurozone. Companies also often reported that staff absenteeism due to illness or the need to self-isolate also inhibited activity.

Tourism and recreation activity consequently fell at a rate not seen since last February, with transportation and media work also in decline. However, many other business service providers and financial services firms continued to report solid growth, being less affected by the Omicron wave than consumer-facing industries.

Manufacturing growth meanwhile accelerated to the fastest since last August. Although staffing issues curbed output in some factories, supply constraints eased, helping boost production in many firms. Average supplier delivery delays lengthened to the least extent since January of last year, with fewer items reported in short supply and shipping delays showing signs of easing. Growth was recorded in all major manufacturing sectors, including a second consecutive month of rising production in the auto sector.

By country, business activity rebounded in Germany after a slide into mild contraction in December, registering the strongest expansion since September thanks to a surge in factory production and a return to growth for the service sector. In contrast, growth in France hit the lowest since April, reflecting a near-stalled factory sector and a sharply weaker service sector performance. Meanwhile, growth ground almost to a halt across the rest of the region as a whole amid a renewed contraction of services activity.

The survey gauge of new orders signalled a further expansion of demand, albeit at the slowest rate since the upturn began last March. While new orders for goods increased to the greatest extent since last August, inflows of new business into the service sector slowed to near-stagnation.

Backlogs of work nevertheless continued to increase in both sectors as supply and labour constraints often inhibited efforts to expand output, despite employment once again growing solidly during the month. Manufacturing jobs growth hit the highest since last July, close to all-time highs, though service sector jobs growth waned to the lowest since last May. Overall, the rise in employment was identical to that seen in December.

Average selling prices measured across both manufacturing and services meanwhile picked up to grow at a rate matching the survey all-time high recorded in November. A new record was seen in the service sector as costs were driven higher by energy and wage costs. Prices charged for goods leaving the factory gate also rose at an increased rate, just shy of November’s survey high, though an easing in manufacturers’ input price inflation to the lowest since last April was also reported, linked in part to the alleviating supply crunch.

Finally, future expectations improved marginally for a second month running. Although the Omicron wave dented optimism in the service sector, prospects among manufacturers brightened, with easing supply chain delays helping drive future output expectations to the highest since last June, rising across the region but most notably in Germany.

Japan: Renewed downturn in private sector activity in January

Flash PMI data indicated that activity at Japanese private sector businesses dipped into contraction territory for the first time in four months at the start of 2022. The pace of decline was modest, and led by the sharpest fall in services activity since August, while manufacturers commented on a slight quickening in output growth.

Private sector firms reported that the surge in COVID-19 cases from the more transmissible Omicron variant had hindered client confidence, most notably in customer-facing industries across the service sector as restrictions were re-introduced across various prefectures including the capital Tokyo.

Disruption was also reported in the labour market, where employment levels fell for the first time in a year. Positively, it appeared that price pressures may have peaked at the end of last year, as firms noted a softening in input price inflation for the first time in five months. Finally, firms remained confident regarding the year-ahead outlook for activity in Japan, though optimism waned to the weakest since January 2021.

Your Raise Might Be Stock Investors’ Pay Cut Inflation and wage pressures are about to rain on investors’ parade

(…) The earnings environment over the next year could be a lot different. Most economists forecast that the economy will slow down, that inflation will moderate and that the unemployment rate will keep falling. For companies, that trend translates to sales growth slowing, pricing power easing and wage pressures intensifying. Profits could suffer as a result. (…)

The best outcome might be one where the economy grows faster than economists expect, while productivity really picks up. In that case, sales would climb quickly while workers, operating more efficiently, would be able to produce more. Wages might keep rising, but there would be plenty of money left over to feed the bottom line.

That outcome isn’t impossible. Maybe (…) all the new ways of doing things companies were forced to adopt to keep running during the pandemic will unleash a wave of productivity when the pandemic eases.

But with stocks starting to wilt, recall the old saw: “Hope is not a strategy.”

Productivity always spikes up after recessions. Since 2005, productivity growth has ranged between zero and 2%, in the lower half of its historical range (technology growth and efficiency are regarded as two of the biggest sub-sections of Total Factor Productivity):

‘American idle’

This wonderful headline is from Grant’s Interest Rate Observer, continuing with this:

Credit The New York Post (Alexander Hamilton, founder) with the headline above and the news item below:
On Reddit, the “antiwork” [community] is now one of the social network’s most active and engaged pages, after seeing explosive growth during the Covid-19 pandemic. It currently has more than 1.6 million users, up from 180,000 in October 2020. People post epic text and email screenshots of quitting their jobs, but the real heroes are the so-called idlers—those who stay in jobs doing the absolute minimum while still collecting a paycheck.

The WSJ adds:

• The Underside of the ‘Great Resignation’ The trend toward idleness has been years in the making, says the author of ‘Men Without Work.’ That’s an ill omen for the economy and the culture.

(…) “Male labor-force participation has dropped after most recessions in the postwar era,” Mr. Eberstadt says. “When the economy recovers, it ticks up a little but never gets back to where it was.” In other words, staying out of work even during good times has become an America tradition. (…)

Population aging is a major cause of the drop, with a greater share of Americans now at retirement age. “But the work rate for prime-age people—25 to 54—has also been going down since the turn of the century.” (…)

“In 1961, labor-force participation for prime-age men was at 96.9%,” Mr. Eberstadt says. Since then, “the chart looks more or less like a straight line down.” By November 2021, “the seasonally adjusted rate was 88.2%.” Almost 1 in 8 men is sitting out during his best years.

That may not sound huge, but the drop is unprecedented. “Would we think it was a crisis if the work rate fell below the Great Depression level?” Mr. Eberstadt asks. “Well you can check that box. We’re already there.”

(…) “America has been overtaken by the European Union” Mr. Eberstadt says. “This is not a bad joke.” Thirty years ago, America’s prime-age work rate was “nearly 10 percentage points above Europe’s. Now Europe’s is a couple of points higher than America’s.” The drop reduces household income, corporate earnings and government revenue. (…)

What is filling idle men’s time? “There’s a lot of staying at home, it seems. And what they report doing is ‘watching.’ They report being in front of screens 2,000 hours a year, like that’s their job.” Women again trail the men, but not by much. In 2019 childless women without jobs said they spent seven hours a day in “leisure,” a category dominated by entertainment. (…)

An abundance of streaming movies, videogames and social-media sites consume ever more of most people’s time. “This is not what Marx would have called the ‘higher pursuits’ of leisure,” Mr. Eberstadt says. “There’s something fundamentally degrading about this.”

(…) with almost two open jobs for every unemployed man and woman. Lack of opportunity isn’t the main reason folks are sitting out. (…)

Inflation Poses Risks of Faster, Less Predictable Fed Rate Increases Promises or clues about rate plans are growing harder to deliver

The Federal Reserve is entering an unfamiliar environment at the start of 2022. For the first time in decades, officials are preparing to raise interest rates when inflation is uncomfortably high rather than very low. (…)

Central-bank officials last month penciled in three quarter-percentage-point interest rate increases this year. That would lift their benchmark short-term rate to a range between 0.75% and 1% by the end of the year, from its current level near zero.

They based the projections for the increases on a forecast that sees inflation falling below 3% by December. Some have indicated, however, that if it looks like inflation is on track to stay above 3% by then, they would have to raise rates more aggressively. The goal would be to lift them back faster to a level aimed to slow down hiring and economic growth, which most officials estimate is somewhere above 2.5%.

A faster pace of rate rises later this year could call for increasing rates at consecutive policy meetings, which are scheduled roughly every six weeks—something the Fed hasn’t done since 2006. (…)

Given the uncertainty, officials will also have to debate whether to offer any meaningful forward guidance, the words they use to describe their intentions for interest rates over the next few years.

Forward guidance has been an important part of the Fed’s monetary-policy arsenal for most of the past two decades, a period in which inflation and interest rates have generally been low. (…)

• IMF chief warns world economy faces an ‘obstacle course’ this year Geopolitical tensions, the pandemic, inflation, rising US rates and China’s slowing economy will make for a bumpy ride
• OECD Metrics Show a Broad Slowing Is -and Has Been- in Progress

(…) The OECD constructs these variables in such a way that index levels below 100 indicate slower than normal growth. (…)

Canadian Retail Sales Dropped 2.1% in December on Lockdowns Retailers sold 2.1% fewer goods in December, according to a preliminary estimate released Friday by Statistics Canada. That’s after a 0.7% gain in November and a 1.5% increase in October, the agency said.

• Debt-Strapped Canadians Brace for a Risky Rate-Hiking Cycle Total private and public debt outside of the financial sector, meanwhile, has risen by more than C$1 trillion ($802 billion) to C$8.1 trillion through June last year. That represents about 345% of gross domestic product, the sixth highest among the more than 40 rich economies tracked by the Bank for International Settlements.

EARNINGS WATCH

We have 64 companies in, a 77% beat rate and a +5.8% surprise factor spread across the board. So far, so good. Analysts keep revising up although somewhat less enthusiastically:

Q1’22 estimates are down a little, from +7.5% to +7.0% with full year 2022 estimates seen reaching $223.61, up 8.3%.

With that level, the S&P 500 would be 19.6x forward EPS, where it bottomed in 2002. The R20 P/E would be 25.1, still overvalued with inflation at 5.5%..

The next 2 weeks will be critical.

• Goldman Sachs notes that “Following the release of 4Q results, only six companies in the S&P 500 provided formal near-term guidance for 1Q 2022. Unfortunately, five of the six firms guided below consensus for next quarter, including three of the stocks that actually beat expectations in 4Q. Only Micron Technology (MU) “beat-and-raised. (…) In absolute terms, equity valuations remain high, regardless of the metric used (94th percentile vs. the last 40 years).

Morgan Stanley Says ‘Winter Is Here’ for Stocks If anything, the retreat has further to go, Wilson and his colleagues wrote in a note, borrowing again from Game of Thrones to warn that “winter is here,” with concerns about a slowing economy poised to take over from jitters over Federal Reserve policy as the main force pulling stocks lower.

Investors sell out of IPOs early at record rates as stocks boom Frothy markets are prompting founders and their backers to break the traditional 180-day lock-up period

Has the Nasdaq Finally Caught Up With Reality? The beginning of earnings season is confirmation that investors really do need to be worried about rising cost pressures.

(…) A number of sell-side analysts are making the point that for the last three or four decades, the stock market has carried on doing fine after the Fed started raising rates. And it’s done fine when the 10-year Treasury yield started to rise. But we haven’t had any inflation for the last three or four decades! The picture is very different and that is why it’s hard to make as much sense of what’s going on. We lack recent precedents for what happens when inflation is as uncomfortably high as it is now. And that makes the whole macro picture that much harder to discern. (…)

There’s an old joke about asking for directions in Ireland. They say, “If I were you, I wouldn’t start from here.” That’s what really creates the greatest problem for the Fed. (…)

• Roughly 40% of NASDAQ stocks are down 50%+ from their 52W highs
• Nasdaq 100’s Unrelenting Declines Ring a Dot-Com Bust Alarm Bell

(…) A full week of big down days hasn’t happened since the dot-com bubble burst, first in April 2000 and then in September 2001. Back then, the Nasdaq went on to fall another 28% before the market bottomed roughly a year later. (…)

Down almost 12% in January, the Nasdaq 100 is on course for its worst month since the 2008 global financial crisis. (…)

• Morgan Stanley’s Slimmon Warns Against Buying Growth-Stock Dip

(…) the reason why I believe once the fever breaks, it lasts a long time, is if you wind the clock back, if you look at some of these uber-growth funds back to where they were in early fall of 2020, that means a lot of people haven’t made money, right? Because they chased into them after they peaked.

And the reason why the dot-com analogy is correct is that that means that every time they start to go up, there’s someone that can get out even. And so there’s tremendous selling resistance at higher levels because so many people have lost money. And that to me is very similar to the dot-com bubble, and other bubbles. Once a very speculative bubble breaks, it’s not a V bottom because there’s too many people looking to get out. (…)

In 2000, the Nasdaq had obscene prices. You also had some of these very big-cap tech stocks trading at triple-digit multiples. And when I look at these uber-growth stocks, they’re expensive as they were in 2000, but the main tech stocks, the Nasdaq 100, the big stocks, they’re not as expensive. So I don’t think the (comparison to the) Nasdaq break of 2000 is quite accurate because I don’t think the really big tech stocks are as vulnerable. (…)

But what are the conditions you would look for to be in place to bring that trade back?

A. Well, I think it’s first seller exhaustion, where stocks stop going down on bad news because there’s no one left to sell them. And I’m just not sure we’re there yet. I haven’t seen big capitulation. (…)

Trust but verify: IT P/Es are indeed significantly lower than in the late 1990s. The weighted P/E is 35.5 and the median P/E 25.5 (Chart from CPMS/Morningstar).

Another way to look at this from Ed Yardeni:

TECHNICALS WATCH

The gradual market degradation since summer culminated into a potentially oversold market but selling pressure has clearly overcome buying power even among the larger caps. The S&P 500 ten largest stocks declined 7.1% on average last week vs -5.7% for the weighted index and -5.3% for the equal-weighted index.

The 500 is resting on its 200dma…

…still rising while its 100dma has turned down last Thursday. At -8.8%, not a conventional correction yet.

This is a valuation correction since the Fair Value line (yellow @ 3000) is still rising thanks to strong earnings growth in Q4, more than offsetting rising inflation, so far.

Note that the Rule of 20 P/E always reverts to its “20” mean, either because equities correct the excessive valuation (most of the times) or, occasionally, stocks keep rising but Fair Value rises more rapidly (earnings up /inflation down like in 1971-73, 1975, 1992-94).

Some pundits compare the present period to 2000-2002 when the S&P 500 cratered 46% from 27x to 19.2x (30x to 20x on the R20 scale). Profits dropped 20%. But there was no inflation problem in the late 1990s-early 2000s (highest core inflation was 2.7%). Yet, the Fed hiked the discount rate from 4.5% to 6.0% in less than 12 months.

Note also that 10Y Treasuries were 5.7% when the Fed first hiked. They peaked at 6.8% in January 2000 before slipping to 4.8% when the recession began in early 2001.

With trailing EPS at $207.10, Fair Value would be 3000 given 5.5% inflation. It would be 3625 at 2.5% inflation.

How Robinhood Investors Robbed Themselves Herding into the same stocks made novice investors feel like geniuses, but the party is over and it was predictable

(…) Back in 2020 when millions of mostly young people opened brokerage accounts for the first time while sheltering from the Covid-19 pandemic, it seemed like they could do no wrong, even as some legendary investors could do no right. Dave “Day Trader” Portnoy poked the most revered one of them all to his millions of Twitter followers:

“I’m sure Warren Buffett is a great guy but when it comes to stocks he’s washed up. I’m the captain now.” (…)

As those who stuck with the 91-year-old Mr. Buffett in rocky 2020 would agree, slow and steady wins the race.

or ?

• JPM notes that the retail crowd is still buying the dips: “After a slow first few days in January, retail came roaring back and has now bought ~$24B in US equities + ETFs YTD on QDS estimates, 45% higher than at this point in 2021 and ~2x the 2016-21 average. The rolling one-week average daily net bought for the group now sits at ~$2.5B – the highest since Feb. of last year and only the 4th time such a level has been reached on QDS records. Thematically, retail continues to favor Growth with Tech, and Discretionary – plus Financials – the top 3 sectors bought with YTD.”
• Goldman says that: “The very important “Retail Trader” has stopped dip buying, stopped weekly call option buying, stopped taking street short single name upside gamma. What is more, “Retail Outflows” are starting for the first time since opening accounts. Volumes have declined on both index and favorite trading stocks.”

This from The Daily Shot:

Whatever they bought last week, their bids were happily received by a flood of sell orders. Small caps were hit hard and went through a 12-m resistance line very hard. The Russell 2000 is down 19.4% from its November 8 high.

The S&P 600 fared a little better, stopping at its own resistance level but now displaying declining moving averages:

Unlike the Russell 2000, S&P 600 companies must be profitable and offer reasonably liquid stock floats. Their relative trends are another way to measure animal spirits as John Authers shows:

(…) Comparing valuations of the Russell and the S&P indexes is also interesting. The Russell occasionally makes negative profits, so it’s difficult to follow patterns using the price/earnings multiple. The following chart is based on the earnings yield, the inverse of the P/E, in which a higher yield indicates that a stock is cheaper: (…)

Despite its travails of late, the Russell 2000 isn’t cheap. There is further it could fall. But the behavior of the S&P 600 compared to the large-cap S&P 500 is fascinating. Smaller companies generally have more growth ahead of them, and all else being equal, will command a higher multiple. But the 600, for the first time in 20 years, is now significantly cheaper than the 500. Compared to its own history, it’s as cheap as it’s been since the worst of the 2008 financial crisis. On a valuation basis, then, it looks like there might actually be some bargains among smaller companies, which helps explain why there is so much positivity around the value factor at present. Meanwhile, something looks very strange about the multiples that the biggest companies are commanding. (…)

Actually, as Ed Yardeni illustrates, the S&P 600 is as cheap as it’s been since 1999 barring recessions.

I bet that the average investor today would claim that small cap earnings grow more slowly than large companies’. Wrong!

And the same average investor would also assert that small caps are less profitable and less capable of navigating a rising cost environment. Wrong! Small caps’ margins sure got hit relatively harder by the pandemic but no more:

If analysts are right, profits of the smaller 600 will keep outperforming the larger 500:

A recession would negate that.

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