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The Weekend Edition # 51
The Bear Market Rally; Jobs Data and the Wage Spiral; Earnings Beating Estimates; Mr. Buffett does it again!
Welcome to another issue of the Weekend Edition.
Thank you to all who’ve read and subscribed to the newsletter this week!
Here’s what we cover:
Market Recap - What a Rally!
Macro - Jobs Data and the Wage Spiral
Earnings Results - Beating Estimates
Premium Post of the Week
The Week Ahead - Economic & Earnings Calendar
Closing Thoughts - Mr. Buffett does it again!
Let’s dive in ⬇️
Market Recap - 01 Aug - 05 Aug, 2022
Happy August! And what a start to the month it has been!
Other than the Dow, every broad market index closed in the green for the week. While the Nasdaq and Russell still remain in a technical bear market, the SPX has recovered quite nicely over the last two weeks. Consensus estimates say we could even look at 4200 as a target.
The burning question: Is this the start of a new bull market? I don’t think so. There’s overwhelming macro economic evidence that the we’re going to see another leg down. Bear market rallies are crazy, and they can very well seem like the start of a new bull market.
Much of this run was driven by earnings. Where we had thought that earnings were going to fail estimates, many companies have actually come out fairly okay according to “analyst estimates”. But, a look under the hood will tell you a very a different story. I will cover some of that under the earnings section below.
A look at bonds as well suggests that we’re not done with this bear market. Bonds have been very volatile this week, with yields increasing towards the end of the week. We also saw the MOVE index increase which could suggest an increase in the VIX.
Some suggest inflation has peaked and worries about inflation have now been replaced with worries about recession. Overall, with energy costs reducing, we just may see a downward change in headline inflation numbers but, a look under the surface still shows us that shelter and food inflation remain upward sticky. We will see what the CPI data brings us next week.
The Fed however, gave no indication of slowing down their tightening. They still see inflation as a major problem (rightfully so!) and the recent strong jobs data gives the Fed even more reason to continue with their tightening.
Finally, the Yield Curve remains inverted and in fact, the inversion has just increased making new lows for the past 20 years. This is yet to be the longest but, it won’t be too surprising if we get there.
Macro of the Week - Jobs Data and the Wage Spiral
The Jobs report this week was surprising, to say the least. With job openings decreasing, news of layoffs and initial jobless claims increasing, I doubt anyone expected the unemployment rate to go down. But, here we are at a 50-year low of 3.5%, the same rate right before the pandemic hit. Non-farm payrolls increased to 530,000 more than double the expected number of 250,000 and higher that the prior months 398,000.
Not surprisingly, job growth was led by gains in leisure and hospitality, professional & business services and healthcare. As the economy re-opens during the summer travel season, these are the jobs that are being filled most rapidly. In healthcare, the largest increase was seen in outpatient services.
This just gives the Fed more reason to tighten aggressively despite the slowdown, pushing the economy even further into a recession.
It also presents a further economic conundrum. When unemployment is low, i.e., if the economy is near full employment, it creates a wage-price spiral. In theory, employees have the bargaining power to demand higher wages as there aren’t enough workers in the economy to fill vacancies. This in turn, can drive up costs and result in further inflation. It’s a vicious cycle and indeed a very plausible one, with the labor force participation rate still remaining low at 62.1%.
Earnings of the Week
Compared to estimates, companies have been making out okay. But, the actual results paint a different picture. Earnings growth is declining. The growth rate is close to Q4, 2020. What’s more is that this earnings growth includes energy. Excluding energy, the current quarter registered an earnings decline of -3.7%.
The same can be said about revenues and estimates.
The Week Ahead
Economic Calendar - CPI and PPI next week
Closing Thoughts - Mr. Buffett does it again!
Berkshire Hathaway reported today and Mr. Buffett and team delivered yet another stellar quarter with a 39% increase in operating profits. As the company’s share price increased during the quarter, share buybacks decreased to just $1 billion down from $3.2 billion in the first quarter.
Taking into consideration listed equities, the company made a bottom line loss of $43.8 billion this quarter, compared to profits of $28.1 billion, a year ago. Again not surprising, given the decline in the stock market. They did however, increase their stake in Apple and Chevron, and of course Occidental.
And in case you missed it, I appeared on Fox Business on the Making Money with Charles Payne show, earlier this week to discuss Apple, earnings and energy.
Here’s wishing you a happy weekend and safe investing.
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Ayesha Tariq, CFA
There’s always a story behind the numbers
None of the above is Investment Advice. I may or may not have positions in any of the stocks mentioned. I have a long position in $AAPL, $BRK-B as of the date of publication of this newsletter. I have no affiliation with any of the companies that are mentioned.