Market comment 2022

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Fiscal policy reduced U.S. GDP growth by 3 percentage points at an annual rate in the first quarter of 2022, the Hutchins Center Fiscal Impact Measure (FIM) shows. The FIM translates changes in taxes and spending at federal, state, and local levels into changes in aggregate demand, illustrating the effect of fiscal policy on real GDP growth. GDP fell at an annual rate of 1.4% in the first quarter, according to the government’s latest estimate.

Hutchins Center Fiscal Impact Measure

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For a possible answer, we need look no further than BofA Global Research’s note on Tuesday entitled, “Ad recession concerns becoming a reality.” The thesis: the base of advertisers paying Snapchat for pre-roll ads or integrated content is the same base of advertisers paying Google. Or Pinterest (PINS). Or the company formerly known as Facebook. “[W]e expect a sentiment overhang on the Internet group until 2Q earnings in July,” the note reads. Analysts at Jefferies echoed this view, arguing in a note Tuesday that they believe it's "highly unlikely" ad market weakness is isolated to Snap.

In February, Meta reported poor revenue guidance and blamed privacy changes to Apple’s iOS mobile system. Snapchat shares lost 20%. What happened after the bell? Snap reported its own earnings, said it had achieved a net profit for the first time, and shares about doubled the next day. How about the quarter before that? The company missed on revenue expectations, teased the impact of the iOS changes, and then the stock sold off by 25%.

Snap shows ad market's nightmare 'becoming a reality'

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We are now at a critical juncture in the effort to resolve these audit access issues. About $1.7 trillion in securities of China-based issuers are listed on exchanges in the United States. These securities could face trading prohibitions in as little as two years, which means the issuers of those securities will no longer have access to US capital markets because they are not in compliance with regulatory requirements. Today, I am going to discuss how we got here, what is at stake, and what needs to happen for the securities of China-based issuers to remain listed and traded in the United States. To this end, I want to underscore four main points in my remarks today

SEC.gov | Resolving the Lack of Audit Transparency in China and Hong Kong: Remarks at the International Council of Securities Associations (ICSA) Annual General Meeting

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We examined data on consumer expectations from both the Conference Board, an international research organisation, and the University of Michigan, and found that this data predicts every one of the last six US recessions called by the NBER several months before they happened. Our data also does not falsely predict recessions that didn’t occur. This data is now in recession territory in 2022, suggestive of an imminent US downturn.

This data accurately predicts recessions, and it’s predicting one right now - Prospect Magazine

At Berkshire Hathaway’s annual shareholders meeting on Saturday, Buffett recommended against obsessing over finding a perfect time to buy a stock. Rather, the Berkshire Hathaway CEO said, go ahead and invest, and then observe the stock market over time to see if you should buy more of that company’s stock or sell it. Buffett said that he, longtime business partner Charlie Munger and other Berkshire Hathaway executives have long used this strategy because it has a higher chance of return, and it alleviates some of the pressure of trying to predict the stock market. If the value of a stock dips after you buy it, Buffett noted, that means its shares have become less expensive — so buy more of them. “We haven’t the faintest idea what the stock market is going to do when it opens on Monday,” Buffett said. “We’ve not been good at timing. We’ve been reasonably good at figuring out when we were getting enough for our money.”

Warren Buffett: Why you should navigate, not predict, the stock market

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Global markets enjoyed a broad-based rally on Friday, while the yield on benchmark U.S. Treasuries fell after data showed that U.S. consumer spending rose in April and the uptick in inflation slowed, two signs the world's largest economy could be on track to grow this quarter. Consumer spending, which accounts for more than two-thirds of U.S. economic activity, increased 0.9% last month, and although inflation continued to increase in April, it was less than in recent months. The personal consumption expenditures (PCE) price index rose 0.2%, the smallest gain since November 2020. read more

World stock markets rally, treasury yields fall on inflation data | Reuters

However:

The only good thing for the QQQ was that the Fed minutes didn't reveal anything new. That helped push implied volatility levels down across the market, leading to the frenzied buying spree. But from the weight of the evidence, the QQQ and the NASDAQ rally would appear to be nothing more than a mechanical bounce due to implied volatility unwinding.

QQQ: The Stock Market Gains May Melt Away Quickly | Seeking Alpha

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There were hopes that supply chain issues would start to abate in the first half of 2022 as the effects of the pandemic became contained in more countries. But other events, such as the war in Ukraine, have added new bottlenecks. And with lockdowns in Shanghai and other key cities across China, pandemic-driven snags are hurting supply chains again.

Across a wide spectrum of industries, companies have been trying to get a handle on when supply chain logjams will improve, but it’s been a moving target virtually everywhere.  “No one really knows,” says Morningstar senior equity analyst Michael Field, who covers shipping and logistics. “Nearly every company has supply chain issues. The number of companies doing anything about it is far fewer.” MORE ON THIS TOPIC Is an Economic Recession Likely? (And How Much Does It Matter?) 

Field points to a few bright spots. Labor availability has improved in key areas, such as ports, to help move goods across the world. Companies have been signing long-term contracts with shippers to secure transportation, which was normally a buy-it-as-you-need-it market prior to the pandemic, Field says. Some of the industries most significantly hit by global supply chain shortages include semiconductors, automobiles, industrials, retail, and restaurants. Below, we’ll highlight how issues have progressed for each of those industries.

Where Does the Supply Chain Crisis Stand Now? | Morningstar

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The five pillars of global financial stability are faltering dangerously, according to quant research shop Gavekal-IS.
Currently, "the conditions for a global equity crash are met," Gavekal said in a note. "No prophecy here, simply the observation of risk states."
The five pillars are world dollar liquidity, energy costs, international trade, inflation and fear.
Looking at them separately:

1. World liquidity in U.S. dollars contracting fast. The MSCI World index (URTH) returned -2% cash per annum in liquidity contraction times vs. cash +135% in expansion, they said..
   
2. U.S. energy costs spiking at uncharted levels. Gavekal's U.S. Primary Energy Index rose by 150% in the last 12 months, the highest inflation in 120 years.
   
3. Global trade is severely damaged. The Dow Transportation Index (DJT) (IYT) is a good proxy for international trade and is at its lowest leve in seven months. When "it reaches new highs, US and global equity markets follow," they said.
   
4. Inflation has diffused globally. Gavekal's Inflation Index tracks 40 countries with a range of 0% (no countries with inflation) to 100% (all countries). It now stands at 100% for the second time in 50 years, the last being September 2008.
   
5. Fear Index similar to 'dangerous' periods. Gavekal's Fear Diffusion Index, a measure of equity tail risks exhibited in 40 different markets, is now 70% on a scale of 0% to 100% (see chart at bottom). "The Fear Index is a warning that equity markets are ready to amplify bad news if they occur, not that bad news will occur."
   

In deperate times, strong leaders have been able to turn situations around, but international leaders are weakened by domestic concerns, Gavekal added.
"The chances of a strong and coordinated international leadership to set things straight do not look promising."
See why JPMorgan strategist Marko Kolanovic argues for a second-half stock rebound.

Conditions for a global stock meltdown have been met | Seeking Alpha

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Others ridiculed the notion of “peak inflation,” the idea that price pressures had peaked in March, and then started to slacken in response to the Fed’s measures. The Feds first hike to its policy rate since 2018 came in March, but has been followed with plans for much higher interest rates this year. The CPI data wasn’t alone in terms of alarming data points released on Friday. The University of Michigan’s consumer survey, also showed consumers are even more pessimistic now than they were during the depths of the financial crisis.

Employment remains the lone bright spot of the economy right now: the unemployment rate remained at 3.6% in May as the U.S. economy added 390,000 jobs. Even so, rising costs for consumer goods are taking a toll. Revolving consumer credit in the U.S. — essentially a proxy for credit-card usage — exploded to near record levels earlier this month.

“Is this a sign of consumer health – or rather a consumer screaming out in end-of-cycle pain as their incomes are crushed by the cost of living crisis?” Société Générale’s Albert Edwards asked in a recent note to clients. Tom Porcelli, a U.S. economist at RBC Capital Markets, agreed that it could be cause for concern. “There’s been a pretty rapid acceleration in credit usage, I don’t think that’s a good development,” he said during a phone call with MarketWatch.

Dow tumbles as inflation reading triggers market shock waves: What investors need to know - MarketWatch

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Also in the camp of prescient calls is The Kobeissi Letter’s editor in chief and founder Adam Kobeissi. In a June 6 newsletter, (shared on this column) he warned followers that 4,090 would mark a “battleground level” for the S&P 500, and failing that was a clear path to 4,050. He had a stop loss set at 4,160, which marked the exact top for the index before the big pullback set in. Sharing his latest thoughts in our call of the day, Kobeissi returns with a warning of more medium-term downside ahead, and no stock bottom until we see some classic signs: “At a high level, we have yet to see a real VIX VIX, -1.12% spike yet and panic selling has not set in year. Generally speaking, we do not see bear markets bottom without panic selling, similar to what was seen in 2001 and 2020,” he told MarketWatch on Monday. “Historically speaking, no bear market has ever bottomed without a VIX reading of 45 or more.” And possibly even a limit-down day on the S&P 500 would help build a bottom case, he adds. 

In the near term, he sees some modest signs of an oversold market that’s trading below the 3,846 daily bottom Bollinger Band, with a daily RSI nearing 30. The Relative Strength Index, or RSI, evaluates whether an asset is oversold or overbought, with sub 30 indicating the former. The Bollinger Band is a momentum indicator that also measures those conditions, along with market volatility. Kobeissi expects pressure on the S&P 500 until Wednesday’s Fed decision, when “buy the news” action may initially lift stocks, but “lose-lose” fundamentals will force selling of any rips. So a relief bounce into 3,860, or even 3,950 is possible before “more weak longs are trapped and we head lower toward 3,500.”

Strategist who nailed the recent S&P 500 top says three things are needed for a market bottom - MarketWatch

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Slumping stocks and surging bond yields are rapidly crimping global financial conditions, yet given their effect on dampening economic growth and eventually inflation, the moves might be welcomed by the Federal Reserve and other central banks. Financial conditions is the umbrella phrase for how metrics such as exchange rates, equity swings and borrowing costs affect the availability of funding for households and businesses. Tighter conditions are widely seen as heralding a growth slowdown and vice-versa.



The widely used Goldman Sachs U.S. financial conditions index (FCI) shows a 100 basis points (bps) tightening this month alone. The last time the U.S. FCI contracted as sharply was during the February-March 2020 COVID-linked sell-off, Goldman data shows. US conditions Goldman's rule of thumb is that a persistent 100 bps FCI tightening slows GDP by about one percentage point after a year, in turn slowing inflation by roughly 0.1 percentage point.

Analysis: For central bankers, tighter financial conditions may be an ally | Reuters