In his podcast addressing the markets today, Louis Navellier offered the following commentary.
Earnings Recession
Yes, the U.S. economy is officially in a recession, but the -1.6% annual contraction in the first quarter was due largely to a dramatic 7.5% drop in worker productivity and the preliminary -0.9% annual drop in the second quarter was due largely to a big drop in inventories as supply and shipping glitches persist.
Q2 2022 hedge fund letters, conferences and more
Specifically, Treasury Secretary Janet Yellen said the reason that second quarter GDP was reported as a contraction was “driven primarily by a change in private inventories, a volatile component by GDP” that shaved 2% off the quarterly reading.” Furthermore, Yellen added that “Job creation is continuing; household finances remain strong. Consumers are spending and businesses are growing.” In conclusion, Yellen attempted to paint a picture of an “inventory recession” versus a “real recession.”
The Institute of Supply Management (ISM) announced this week that its manufacturing index dipped slightly to 52.8 in July, down from 53 in June. Since any reading above 50 signals an expansion, the U.S. manufacturing sector remains healthy and is outpacing purchasing manufacturer indices (PMIs) around the world, including China. The ISM components did show that things are slowing down, since the new orders component was only at 48 in July (down from 49.2 in June) and the backlog of orders slowed to 51.3 (down from 53.2 in June). Interestingly, the inventories component rose to 57.3 in July and the new export component rose to 52.6 as well as the imports component surged to 54.3. The trade deficit has fallen for three straight months due to surging exports, especially in the energy sector.
What is so odd about the U.S. recession in the first half of the year, is that we have not had an “earnings recession” and the unemployment rates remain low. As a result, I find myself agreeing with Fed Chairman Powell, Treasury Secretary Yellen and President Biden on the conclusion the U.S. is not in a real recession, unless you are in the home building business, which is now running at only 42% of its peak.
Institutional investors have concluded that since Treasury bond yields have peaked since mid-June as inflationary pressures are cooling that it was time to go bargain hunting and snap up quality stocks with historically low PE ratios.
This has truly been a stunning announcement season, since flagship stocks like Apple and Amazon have attracted a lot of institutional buying pressure. Major energy stocks are doing even better and crude oil prices have resumed rising due to tight supply/demand imbalances. The U.S. is the Saudi Arabia of natural gas and despite record production, natural gas prices remain near the highest level in 14 years, due to the fact that Russia is rationing gas to Europe and creating chaos.
Energy stocks will continue to post strong sales and earnings due to high prices for both crude oil and natural gas for at least the next six months, even though crude oil prices should moderate by October as seasonal demand ebbs.
The semiconductor shortage persists, which bodes well for semiconductor stocks. Shipping rates remain elevated, which will help shipping stocks continue to prosper.
According to the Energy Information Administration (EIA), crude oil production in the U.S. was running a bit lower at 11.6 million barrels per day in May, so crude oil prices have meandered higher. Although production in North Dakota rose 17.1% in May to 1 million barrels per day, New Mexico output fell 0.7% to 1.5 million barrels per day and Texas output declined 1% to 5 million barrels per day. The EIA also said that U.S. natural gas production in May was running at a record pace.
The bears on Wall Street have been overpowered recently by persistent institutional buying pressure as optimism spreads from inflation cooling and corporate earnings remaining strong.
I have had a lot of conversations with investors to “wait for quarterly earnings” and I will be saying the same thing in September before the third-quarter earnings announcement season commences in mid-October.
Fortunately, the Fed’s last key interest rate hike will occur at the FOMC meeting on September 21, since the next FOMC meeting is only six days before the mid-term elections. There is a lot of excitement about the mid-term elections, since a leadership change is expected in Congress that will likely result in more gridlock, which Wall Street prefers.
US Renaissance
Additionally, the U.S. is in the midst of a renaissance, since China has become a less reliable trading partner as it had to dispatch tanks in the streets to squelch protesters not being able to withdraw their deposits. China’s threat to House Speaker Nancy Pelosi, since she is visiting Taiwan on Tuesday and Wednesday is expected to isolate China further after its military said that it will “not sit idly by” and called Pelosi’s visit would “lead to egregious political impact.”
Also complicating world commerce is that mighty Germany’s export machine has been neutered by Russia rationing natural gas, which is causing chaos as energy rationing envelopes many European countries. The net result is a strong U.S. dollar and the fact that the U.S. is an oasis for investors.
The wildcard out there is that Ukraine would like a ceasefire in its conflict with Russia before winter. The recent agreement between Ukraine and Russia for grain and fertilizer exports to resume in the Black Sea is a good start. If and when there is a ceasefire, the stock market could explode 40% higher in a massive relief rally. The bottom line is the stock market has plenty of upside potential.
Year-End Rally
In conclusion, the current announcement season has proved that earnings matter and have dropped kicked and driven many dividend and growth stocks higher. In reflection of what has happened this year, the stock market overreacted to the Ukraine/Russia war, which ironically has made the U.S. an oasis for international capital and resulted in the strongest U.S. dollar in over two decades.
Due to lower Treasury bond yields, the final Fed rate hike on September 21, resurging institutional buying pressure, PE ratio expansion, optimism for the midterm elections (more gridlock) as well as continued strong forecasted sales and earnings I am expecting a strong year-end rally that will continue into the New Year.
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