Is it the Worst of Times?
Measures of investor sentiment show readings that are the “worst-ever”, or in that vicinity. The National Association of Active Managers Exposure Index posted a reading of 46. That is not the worst ever but well below the average reading of 69 over the series’ history since 2006. The University of Michigan Consumer survey reports a sentiment reading of 65, also well below its average reading of 86 and among its worst ever. Language analysis of media publications by the San Francisco Fed finds that news sentiment is below average, although above pandemic and crisis levels. The American Association of Individual Investors survey recently reported that 59% of respondents are bearish—the worst monthly reading in the history of the series and far worse than reported in the depths of the pandemic and financial crisis. Year-to-date stock returns have reflected this glum sentiment, with the S&P off to its worst start in thirty years. The carnage has been widespread, with few areas to hide outside of commodities which have risen sharply. Yet, some perspective is required. Over the past 12 months, stocks are actually flat and have returned 14% annualized over the past three years. Nonetheless, gloom pervades investors’ thoughts. Is it warranted?
The Economy is Better than it Seems
First-quarter GDP turned slightly negative due to a drawdown in inventories, decreased exports, and increased imports. Meanwhile, personal consumption (spending) rose. Without reverting to an Econ 101 textbook, the simple takeaway is that the spending side of the economy was strong, but the production side was weak. This is consistent with ongoing supply-chain disruptions, as well as the spike of COVID cases in January.
Supply-chain problems, while still problematic, are moderating at the margin. The New York Fed gauge of Global Supply Chain Pressure has declined for the past two months.
Real-time measures of economic activity remain robust. The JPMorgan Chase daily consumer spending tracker shows spending 3.0% above the pre-COVID trend. Johnson Redbook, which tracks same-store sales for major retailers, revealed nearly +15% gains vs. last year in spending.
Mobility data for retail locations (Placer.AI), TSA checkpoint data, hotel and dining data (STR, Adara, OpenTable), Times Square foot traffic (Times Square Alliance), Broadway Show revenue, and other indicators show evidence of a consistently strong consumer.
This strength is consistent with readings from the New York Fed’s Weekly Economic Index which estimates a 4.3% growth rate for GDP. The strong consumer spending data derives partly from a strong job market. Job openings rose to 11.5 million in March as measured by the Bureau of Labor Statistics JOLTS data. With a record number of jobs offered, companies are clearly expecting economic growth to continue. Labor market strength is also reflected by the creation (or resumption) of 560,000 new jobs on average per month this year.
Inflation—Light at the End of the Tunnel?
Inflation remains a persistent and problematic challenge for investing. There are glimmers of hope, however. Recent inflation spiked mainly due to the rapid adjustment to oil prices. Meanwhile “core” prices which exclude food and energy have begun to moderate, trending down from 0.6% in December and January, to 0.5% in February, and 0.3% in March. Real-time pricing data, designed to align with CPI from vendors such as Dot Macro, show a possible easing of inflation in April, partly due to gasoline prices coming off the boil. For these reasons, economic forecaster surveys expect at long last the rate of inflation to post a small decline in the rate of change. While inflation will remain elevated, a move off the peak may begin to provide some relief for investor sentiment.
Earnings & Outlook
Earnings have been fairly strong thus far in 2022, with the S&P 500 posting earnings gains of around 7%. According to FactSet data, this figure would be tracking closer to 10% if not for the large loss posted by Amazon. During the quarter, earnings upside surprises again surpassed sales upside surprises, showing that companies have found ways to navigate supply-chain challenges. Equities face numerous challenges—war, pandemic, inflation, rising rates—and yet much of this bad news seems to be factored into the market, given the atrocious sentiment readings and downdraft in prices and valuations. Volatility may continue in the short term until some improvement can be seen in these problematic areas. We expect investors have largely factored in the aggressive rate-hike path and should draw comfort from inflation readings that are likely peaking. Meanwhile, the outlook for economic growth remains sound and sets the backdrop for continued growth in earnings. We encourage patience and a view across quarters and years.
This communication contains the personal opinions, as of the date set forth herein, about the securities, investments and/or economic subjects discussed by Mr. Teeter. No part of Mr. Teeter’s compensation was, is or will be related to any specific views contained in these materials. This communication is intended for information purposes only and does not recommend or solicit the purchase or sale of specific securities or investment services. Readers should not infer or assume that any securities, sectors or markets described were or will be profitable or are appropriate to meet the objectives, situation or needs of a particular individual or family, as the implementation of any financial strategy should only be made after consultation with your attorney, tax advisor and investment advisor. All material presented is compiled from sources believed to be reliable, but accuracy or completeness cannot be guaranteed. © Silvercrest Asset Management Group LLC
