On Earnings Season and Fed Watch:

Peter’s Economy and Market Wrap, July 21, 2023

• CLICK HERE for a free coupon to Peter’s Strategic Macroeconomics for Business and Investing online course.  It’s a $20 value free to Peter’s substack subscribers and social media followers.  Only 100 available so get yours now….

This week was purely a momentum week as all major indices have been hitting new highs and breaking through what are called levels of “resistance.”  The idea is that once you get above resistance, a stock will run for a while without the worry of traders cashing in at a point where they initially took a loss and just want to get their money out. 

Mo-Mo is a purely “technical” play based on charts rather than a “fundamental” play based on parameters like earnings.  At least part of this momentum is due to small retail investors now coming into the market in greater numbers and buying equity mutual funds as the frenzy not to miss this current rally increases. 

As a rule, the smart money, that is the big Wall Street money, gets in early in the trend and retail investors come in at the end.  To put this another way, retail investor enthusiasm can often be a contrarian indicator – so I note this trend with caution.  This is particularly true since global macro hedge funds have been cutting their exposures to US equities.

Do you get the picture here?  Smart money out, dumb money in, and guess who gets left holding the bag?

As another cautionary note, US markets are partying like its 1999 even as parts of the globe are struggling.  Communist China, for example, reported slower second-quarter growth than expected while the euro zone economy has been suffering from a technical recession.  If foreign countries are not prospering, they are not buying US exports and all of that trickles down to the US growth rate.

One other thing to consider is the clear schizophrenia developing between traditional stocks and those in the artificial intelligence space, many of which are in Big Tech.  AI stocks have been absolutely on fire and that can spike the broad averages while creating a false impression of more general well-being across the markets.  Here’s how one market analyst framed this conundrum, and I count my bearish self as one of the strategists “confounded” by the bull party:

In equities, the main focus continues to be whether the … hype over artificial intelligence has staying power. The S&P 500 has already surpassed most estimates for where it would end the year, confounding strategists convinced that 2023 would be another bad year for markets heading into recession.

As for what to look for over the coming week, it’s Fed Watch and corporate earnings season.  As loyal readers know, I remain highly skeptical of this seemingly “bullish” market but we should all have the good sense not to fight either the Fed or the trend.  The trend is clearly up; and the Fed is turning bullish – or is it?

We’ll get a bit of a reality check on this when the Fed Board of Governors meets on Wednesday and announces its latest interest rate decision.  Will it or won’t it hike another 25 basis points and, perhaps more important, will or won’t the Fed announce a pause in its interest rate hike crusade?

Markets will rally sharply on a “no rate hike,” “indefinite pause” scenario; but that is unlikely. 

The inflation numbers may be trending down here in the US, but core inflation remains far too high and there is a long way to go, inflation is hot in certain other parts of the globe, and there is enough concern at the Fed of stopping too soon for it to completely go the “mission accomplished” route. 

So look for a mixed decision – maybe 25 more basis points with the hope expressed that that might “be enough.”  And do remember that even if the Fed stops raising rates, rates remain high and will continue to bearishly squeeze consumers and businesses.

Now, what about “earnings season”?  The month after the end of every quarter – January, April, July, and October – publicly traded companies report earnings and many give earnings guidance going forward.  So this month, we’re getting a slew of earnings news for the markets to react to.

The first big question is whether a company will beat, meet, or miss the expectations of consensus earnings forecasts from Wall Street.  Everything else being equal, the price of any given stock will reflect the consensus forecast so that if a company beats expectations, its price should rise and if it misses expectations, its price should fall.

Even more important, most companies also provide so-called “guidance” which offers projections of growth and earnings over the coming quarter and beyond.  Obviously, bullish guidance can spike a stock and bearish guidance will drive its price down.

For example, this last week Johnson & Johnson’s stock jumped 6 percent when it beat earnings.  In contrast, both Netflix and Tesla fell nearly 10 percent on an earnings miss for Tesla and a revenue miss for Netflix.

Those trying to forecast the broad market trend will look for the ratio of beats to misses.  At least so far, with a long way to go, about half of the companies reporting beat expectations on both revenue and earnings – not bad, but still a mixed bag.

Okay.  That’s enough wonky economy and markets stuff.  My simplest advice is to cultivate your economic and financial market literacy and you’ll be in a better position to preserve your wealth and protect your job.  If I can help you with that with this weekly column, it’s all good. 

To that end, I’m once again offering a free coupon worth twenty bucks to take my strategic macroeconomics course online.  I taught it for years to MBAs at the University of California and over a million folks worldwide have taken my macro courses over those years. 

Just click on this link!

https://www.udemy.com/course/strategicmacroeconomics/?couponCode=C579C40AB27874B7DDF5