This has been frustrating. The market has a case of the glass-half-empties. Earnings for the most part have been good, but the market would rather focus on the few negatives. We had a big up day when Meta (formerly known as Facebook) reported much-improved numbers, then Amazon disappointed. The cloud business, which is the primary focus of Wall Street, grew only 37 percent instead of the 40 percent that it had been growing. Amazon’s stock was punished along with the rest of the market because of the slowing growth. Seems a little overly harsh to me.
On the other hand, Apple reported a solid quarter and the stock initially rose, but then Tim Cook explained that there are still supply issues coming from China, and the stock went down. Never mind that he said the same thing last quarter, before the company delivered these good results. We are just in a foul mood, and any little excuse leads the market down or thwarts any attempt at a rally.
Underlying all of this is the environment of slowing economic growth and high inflation. The initial reading for Gross Domestic Product (GDP) came out for the 1st quarter of 2022 and the economy shrunk by 1.4 percent. Meanwhile, we have 8.5 percent inflation. The Fed is making hawkish statements and the market is nervous, but then raised rates by 0.50 percent as expected. The Fed bark remains much fiercer than its bite and one wonders when the market will ever learn that lesson. Many pundits were suggesting that the Fed may raise by 0.75 percent or even higher. Chairman Powell said after their meeting that this was not even discussed. In other words, it was never even on the table.
The economic concerns are real but seem overdone. Unemployment is the key to an actual recession. Unemployment is currently at 3.6 percent and the consumer is relatively healthy. While GDP came in at a negative number, consumption from consumers actually rose approximately 4 percent. The previous read from GDP was 6.9 percent growth, which was driven by inventory-building. This was a makeup from the previous quarter, when we saw significant supply chain issues. It appears to have been an overshoot, which means there was slower inventory-building this quarter, leading to negative growth. Other contributors were slowing of government spending, as we have gotten past the various stimulus measures, and growing imports, which are actually counted as a negative. These are not the makings of a recession.
All of this has combined to take the market roughly back to the lows we had seen earlier this year. We are now at a turning point. Does the market bounce from here, or does this prolonged correction turn into something worse? We believe the market should bounce. Company earnings have been strong, and that is what should matter. While major indexes still appear expensive, this is driven by a small number of large companies. Take those away and stocks are attractively valued. Now the Fed has moved as most expected, and not more dramatically as some feared. The rational move is for stocks to go higher.
Of course, in the words of John Maynard Keynes, “The market can remain irrational longer than you can remain solvent.” While we believe the market should go up from here, we cannot ignore what the market is actually doing. We are watching this point closely and will take action to protect portfolios as needed.
Warm regards,
Chuck Osborne, CFA
Managing Director
