Having warned for months that the market is set to snap, unlike some of his peers like - for example - Goldman's David Kostin who has been uber bullish throughout 2021 even though we learned yesterday that the bank was quietly selling, pardon, "harvesting" billions in stock positions for a third consecutive quarter...
... Morgan Stanley's notoriously bearish chief equity strategist, Michael Wilson has reasons for a victory lap now that many of his peers are scrambling to come up with reasons to turn bearish just weeks after they published their 2022 year-end S&P targets which for 95% of them were above 5,000.
However, Wilson has no time for such flights of fancy, because while we wait for street consensus to follow Wilson into the dark side (giving the all clear to buy stonks), he has decided that to keep differentiating himself he has to be even more bearish, and sure enough in his latest weekly warm up note, he writes that Morgan Stanley's new Fed forecast "simply brings forward our call for lower equity valuations and raises the risk in the first half of the year" as the median stock "remains expensive even though the most egregiously priced stocks have corrected."
Here are the details.
Last week, Morgan Stanley's economics team adjusted its forecasts on Fed policy "given the more hawkish tone in the most recent Fed minutes and commentary from Chair Powell and other governors" and joined the rest of the street in expecting the Fed to fully exit QE by April, increase rates by 25bps 4 times in 2022 and begin balance sheet normalization in the middle of the year. That - needless to say, is a lot of tightening, and fits with Wilson's general bearish outlook for 2022 published in November. To recall, his Fire and Ice narrative assumed the Fed was behind the curve and would need to catch up in a hurry given the dramatic move in inflation we've experienced during this pandemic. As discussed on Friday, consumer confidence measures suggest inflation is the number one concern right now, making this a political issue as much as an economic one especially for Biden, as his rating is now crashing.
And as Biden just said during his press conference, "it is "appropriate for the Federal Reserve to recalibrate” the support that is now necessary to fight inflation, so expect the Fed to keep pushing until financial conditions tighten.
What all that means for equity markets is obvious, but just in case it isn't, Wilson explains: valuations will have to come down this year via a combination of higher back end rates and higher equity risk premiums. And so, the changes to the bank's Fed forecast simply mean "it is likely to happen faster now, making the handoff between lower earnings and higher earnings less seamless."
To be sure, Wilson's outlook for 2022 already incorporated a fairly hawkish Fed, and while that hawkishness has only increased it doesn't change the bank's year-end targets, which are already among the lowest on Wall Street:
Specifically, our base case year-end target for the S&P 500 is 4400, which compares to the median forecast of approximately 4800-4900. This target assumes a meaningfully lower P/E of 18x forward 12-month EPS of $245 at the end of 2022 (down from ~21x today). Our EPS forecast is largely in line with the Street while our target P/E is approximately 10% lower.
The faster taper and hike schedule brings this valuation risk forward to the first half of the year - and considering that the S&P is now just above 4,500 and could drop below 4,400 tomorrow, one can add that the valuation risk has been "brought forward to this month." Furthermore, given the much more aggressive timetable for quantitative tightening, we could even see an overshoot to the downside of what Wilson thinks is "fair value." And what is that?
Our current projected P/E for the S&P 500 is 18x by the end of the year. This target P/E assumed a 10-year Treasury yield of 2.10% and an equity risk premium of 345bps. With our new rates forecast of 2.20% by 2Q and a much more aggressive time line on asset purchase reductions, we think the equity risk premium could easily reach 345bps in the next several months from today's 300bps, particularly if our forecast for falling PMIs pans out. Assuming an equity risk premium of 345bps and 2.2% 10-year gets us to a P/E of ~17.5x by the second quarter of the year. If we roll forward the consensus earnings forecast we get $230 in NTM EPS by the end of 2Q. 17.5x $230 is 4000.
Bottom line, Wilson predicts that the bringing forward of tapering and rate hikes is likely to lead to a 10-20% correction in 1H22 for the S&P 500.
For those who have a different perspective, below are two tables from Wilson that allow readers to make their own assumptions on both rates and ERP to arrive at the price/earnings ratio that makes sense for the overall market as the Fed attempts to exit this period of extraordinary monetary policy more rapidly. The second table translates these P/E into year-end bull, base, and bear targets for the S&P 500 assuming $245 in EPS for 2023.
What little good news Wilson had to clients, is that markets have been adjusting for months to this new reality, with 40% of the Nasdaq having corrected by 50% or more.
As we've noted many times, the breadth of the market remains poor as it goes through the classic rolling correction under the surface as the index grinds higher. This phenomenon is largely due to the relentless inflows from retail investors into equities. On one hand, this rotation from bonds to stocks from asset owners makes perfect sense in a world of rising prices. After all, stocks are a decent hedge against inflation, and much better than owning fixed income. However, certain stocks fit that billing better than others. In its simplest form, it means value over growth stocks or short duration over long.
And while Wilson was completely on board with that view a year ago, he is not as convinced that it's going to be as smooth a ride in 2022: "First, the Fed is going the other direction now, and quickly. Second, growth is now decelerating rather than accelerating. Furthermore, it's decelerating faster than many think, and has a ways to go in our view." Regular ZH readers will not be in the "many" group as we have extensively discussed precisely this accelerated slowdown over the past few months.
Wilson agrees, having made the case for months that PMIs and earnings revision breadth are both likely to fall more than the consensus currently expects. Both of these metrics have a high correlation to stock prices. In the case of PMIs, stocks have already held up better than they should have.
In many ways this looks a lot like late 2019/early 2020, the last time we had such a wide divergence. This has been caused by the extraordinary monetary accommodation from the Fed over the past 6 months, policy that appears way too loose relative to the current economic conditions. And with that policy now changing at an accelerated rate, Wilson expects the relationship between stocks and the PMIs to realign.
5 Top Consumer Stocks To Watch Right Now
Are these consumer stocks a buy amid the earnings season?
The post 5 Top Consumer Stocks To Watch Right Now appeared first on Stock Market News, Quotes,…
5 Trending Consumer Stocks To Watch In The Stock Market Now
As we tread through the earnings season, consumer stocks could be worth watching in the stock market this week. This would be the case since a number of big consumer names such as Costco (NASDAQ: COST) and Macy’s (NYSE: M) will be posting their financials for the quarter. As such, investors will be keeping an eye on these reports for clues on the strength of consumer spending amid this period of high inflation.
However, despite the soaring prices across the economy, it seems that consumers are surprisingly showing resilience. According to the Commerce Department, retail sales in April outpaced inflation for a fourth straight month. This could suggest that consumers as a whole were not only sustaining their spending, but spending more even after adjusting for inflation. Ultimately, it could be a reassuring sign that consumers are still supporting the economy and helping to diminish the narrative of an incoming recession. With that being said, here are five consumer stocks to check out in the stock market today.
Consumer Stocks To Buy [Or Sell] Right Now
- Nordstrom Inc. (NYSE: JWN)
- The Wendy’s Company (NASDAQ: WEN)
- Foot Locker Inc. (NYSE: FL)
- Tyson Foods Inc. (NYSE: TSN)
- DoorDash Inc. (NYSE: DASH)
Starting off our list of consumer stocks today is Nordstrom. For the most part, it is a fashion retailer of full-line luxury apparel, footwear, accessories, and cosmetics among others. The company operates through multiple retail channels, boutiques, and online as well. As it stands, Nordstrom operates around 100 stores in 32 states in the U.S. and three Canadian provinces.
Yesterday, the company reported its financials for the first quarter of 2022. Starting with revenue, Nordstrom pulled in net sales worth $3.47 million for the quarter. This marks an increase of 18.7% from the same quarter last year. Its Nordstrom banner saw net sales rise by 23.5% year-over-year, exceeding pre-pandemic levels. Next to that, its Nordstrom Rack banner saw a 10.3% increase in net sales from last year. Besides, net earnings were $20 million, with earnings per share of $0.13 for the quarter. Considering Nordstrom’s solid quarter, should you invest in JWN stock?
The Wendy’s Company
Next up, we have The Wendy’s Company. For the most part, it is the holding company for the major fast-food chain, Wendy’s. Being one of the world’s largest hamburger fast-food chains, the company boasts over 6,500 restaurants in the U.S. and 29 other countries. The chain is known for its square hamburgers, sea salt fries, and the Frosty, a form of soft-serve ice cream mixed with starches. WEN stock is rising by over 8% on today’s opening bell.
According to an SEC filing, Wendy’s largest shareholder, Trian Partners, is looking into making a potential deal with the company. Trian said that it is considering a deal to “enhance shareholder value.” Also, the firm adds that this could lead to an acquisition or business combination. In response, Wendy’s stated that it is constantly reviewing strategic priorities and opportunities. It added that the company’s board will carefully review any proposal from Trian. Given this piece of news, will you be watching WEN stock?
Another stock investors could be watching is the shoes and apparel company, Foot Locker. In brief, the company uses its omnichannel capabilities to bridge the digital world and physical stores. As such, it provides buy online and pickup-in-store services, order-in-store, as well as the growing trend of e-commerce. Some of its most notable brands include Eastbay, Footaction, Foot Locker, Champs Sports, and Sidestep. Last week, the company reported its results for the first quarter of the year.
For starters, total sales came in at $2.175 billion, a slight uptick compared to sales of $2.153 billion in the year prior. Next to that, Foot Locker reported a net income of $133 million. Accordingly, adjusted earnings per share came in at $1.60, beating Wall Street’s expectations of $1.54. CEO Richard Johnson added, “Our progress in broadening and enriching our assortment continues to meet our customers’ demand for choice. These efforts helped drive our strong results in the first quarter, which will allow us to more fully participate in the robust growth of our category going forward.” As such, is FL stock one to add to your watchlist?
Tyson Foods is a company that built its name on providing families with wholesome and great-tasting protein products. Its segments include Beef, Pork, Chicken, and Prepared Foods. With some of the fastest-growing portfolio of protein-centric brands, it should not be surprising that TSN stock often comes to mind when investors are looking for the best consumer stocks to buy.
Earlier this month, Tyson Foods provided its fiscal second-quarter financial update. The company’s total sales for the quarter were $13.1 billion, representing an increase of 15.9% compared to the prior year’s quarter. Meanwhile, its GAAP earnings per share climbed to $2.28, up 75% year-over-year. According to Tyson, these financial figures are a reflection of the increasing consumer demand for its brands and products. To top it off, the company was also able to reduce its total debt by approximately $1 billion. Thus, does TSN stock have a spot on your watchlist?
DoorDash is a consumer company that operates an online food ordering and delivery platform. In fact, it is one of the largest delivery companies in the U.S. and enjoys a huge market share. The company connects hundreds of thousands of merchants to over 25 million consumers in the U.S., Canada, Australia, and Japan through its local logistics platform. Accordingly, its platform allows local businesses to thrive in today’s “convenience economy,” as the company puts it.
On May 5, the company reported its first-quarter financials for 2022. Diving in, it posted a revenue of $1.5 billion, growing by 35% year-over-year. This was driven by total orders that grew by 23% year-over-year to $404 million. Along with that, it reported a GAAP gross profit of $662 million, an increase of 34% year-over-year. The company said that it added more consumers than any quarter since Q1 2021, due in part to the growth of its DashPass members. The growth in Monthly Active Users and average order frequency has helped it gain share in the U.S. Food Delivery category this quarter as well. Given DoorDash’s performance for the quarter, should you watch DASH stock?
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Philly Fed: State Coincident Indexes Increased in 50 States in April
From the Philly Fed: The Federal Reserve Bank of Philadelphia has released the coincident indexes for the 50 states for April 2022. Over the past three months, the indexes increased in all 50 states, for a three-month diffusion index of 100. Additiona…
The Federal Reserve Bank of Philadelphia has released the coincident indexes for the 50 states for April 2022. Over the past three months, the indexes increased in all 50 states, for a three-month diffusion index of 100. Additionally, in the past month, the indexes increased in all 50 states, for a one-month diffusion index of 100. For comparison purposes, the Philadelphia Fed has also developed a similar coincident index for the entire United States. The Philadelphia Fed’s U.S. index increased 1.1 percent over the past three months and 0.3 percent in April.Note: These are coincident indexes constructed from state employment data. An explanation from the Philly Fed:
The coincident indexes combine four state-level indicators to summarize current economic conditions in a single statistic. The four state-level variables in each coincident index are nonfarm payroll employment, average hours worked in manufacturing by production workers, the unemployment rate, and wage and salary disbursements deflated by the consumer price index (U.S. city average). The trend for each state’s index is set to the trend of its gross domestic product (GDP), so long-term growth in the state’s index matches long-term growth in its GDP.Click on map for larger image.
Here is a map of the three-month change in the Philly Fed state coincident indicators. This map was all red during the worst of the Pandemic and also at the worst of the Great Recession.
The map is all positive on a three-month basis.
Source: Philly Fed.
And here is a graph is of the number of states with one month increasing activity according to the Philly Fed.
In April all 50 states had increasing activity including minor increases.
Finding Shelter in an Inverse ETF
As the old saying goes, “What goes up must come down.” Indeed, up until the recent selling wave caused by Russia’s war against Ukraine and the continued…
As the old saying goes, “What goes up must come down.”
Indeed, up until the recent selling wave caused by Russia’s war against Ukraine and the continued effects of supply chain disruptions amid the COVID-19 pandemic, tech stocks, including semiconductors, were the darlings of the investment world. That is, it seemed as if the sky-high valuations of some tech stocks were sustainable in an atmosphere of seemingly perpetual growth.
That, of course, was not the case, and the too-good-to-be-true valuations were quickly brought down to earth by the forces of inflation and tight monetary policy. As a result, the tech-heavy Nasdaq entered a free-fall that has not yet found a bottom.
At the same time, that does not mean that we should abandon the sector as a lost cause. One such way to play the sector during its downhill slide is the exchange-traded fund (ETF) Direxion Daily Semiconductor Bear 3X Shares (NYSEARCA: SOXS).
As its title suggests, this is an inverse ETF, meaning that it is built to go up in value when its parent index goes down. Specifically, SOXS provides three times leveraged inverse exposure to a modified market-cap-weighted index of semiconductor companies that trade in American markets by using swap agreements, futures contracts and short positions.
While the index’s holdings are weighted by market capitalization, the fund’s managers cap the weights of the top five securities in the portfolio at 8% each. The weight of the remaining securities is capped at 4% each.
As of May 24, SOXS has been up 0.37% over the past month and up 24.73% for the past three months. It is currently up 60.47% year to date.
Chart courtesy of www.stockcharts.com
The fund has amassed $258.15 million in assets under management and has an expense ratio of 1.01%.
In short, while SOXS does provide an investor with a way to invest in an inverse ETF, this kind of ETF may not be appropriate for all portfolios. Thus, interested investors always should conduct their due diligence and decide whether the fund is suitable for their investing goals.
As always, I am happy to answer any of your questions about ETFs, so do not hesitate to send me an email. You just may see your question answered in a future ETF Talk.nasdaq stocks pandemic covid-19 monetary policy etf russia ukraine
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