What I Care About This Week | 2023 Apr 17

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Photo by Donald Tong on Pexels.com

by Franklin J. Parker, CFA

The Summary

  • Earnings season has begun! Overall, investors expect an earnings contraction of 5% to 6%. On Friday, we saw earnings from banks, including Wells Fargo, JPMorgan, and numerous regional banks. What became clear was that the top five banks benefitted greatly from the turmoil in regional banks last month. Shares of regional banks fell sharply after their earnings. Banks have also begun building up rainy-day funds to weather a coming storm. It is another reminder that the economic outlook continues to deteriorate.

  • Unemployment figures for March were a bit stronger than expected, although job openings fell below 10 million for the first time in years. We also saw inflation data, which cooled slightly (5.6% year-over-year). Investors took this as a signal that the Fed will begin slowing rate hikes, with their next meeting delivering the final rate hike for the year (of 0.25%). Markets rallied on the news, although it is not particularly good. The Fed tends to cut rates just before recessions, so watching their behavior is a good signal that the economic cycle is ending.

  • The recent everything-goes-up rally is a bit of a head-scratcher. There are few reasons why risky assets should be climbing as much as they have year-to-date. That said, it is not uncommon for stocks to rally into a recession. Nothing is certain, of course, but this rally is not supported by the economic data. It does, however, provide opportunities to adjust portfolios and grow more conservative. As I have been saying for a few months now, this is the time to batten down the hatches — there is a storm on the horizon.

The Details

The US debt ceiling is still looming. What’s the big deal?

It is an open question whether the US Treasury can still pay interest payments on debt if the debt ceiling is not raised. Treasury secretaries from both parties have argued against testing it as there are legal questions as well as financial ones.

US Treasury securities are the keel of the international financial system. A default would be a severe crack in the very foundations of the financial system, and many of the consequences are unknown.

Of course, the US defaulting on her debt is a low probability event — investors have priced a 0.22% probability of that happening. Yet, the consequences are so severe (and unknown) that investors should still pay close attention and take steps to insulate portfolios.

And now is the time to be doing that. If it becomes clear that no deal will get done, everyone will be rushing for the exits at the same time. That, of course, makes it very difficult to get to safety.

Chart of the Week

With earnings season in full gear, it is helpful to review what investors think is going to happen. Remember — it is significant deviations from expectations that move markets. While some sectors are expected to do well this quarter (Consumer Discretionary and Industrials, in particular), overall the market is expected to deliver a contraction of 5% to 6% in earnings. If that happens, it would be two quarters in a row of earnings contractions. Not a good sign, overall.

This document is a general communication being provided for informational purposes only. It is educational in nature and not designed to be taken as advice or a recommendation for any specific investment product, strategy, plan feature or other purpose in any jurisdiction, nor is it a commitment from Directional Advisors to participate in any of the transactions mentioned herein. Any examples used are generic, hypothetical and for illustration purposes only. This material does not contain sufficient information to support an investment decision and it should not be relied upon by you in evaluating the merits of investing in any securities or products. In addition, users should make an independent assessment of the legal, regulatory, tax, credit, and accounting implications and determine, together with their own financial professionals, if any investment mentioned herein is believed to be appropriate to their personal goals. Investors should ensure that they obtain all available relevant information before making any investment. Any forecasts, figures, opinions or investment techniques and strategies set out are for information purposes only, based on certain assumptions and current market conditions and are subject to change without prior notice. All information presented herein is considered to be accurate at the time of production, but no warranty of accuracy is given and no liability in respect of any error or omission is accepted. It should be noted that investment involves risks, the value of investments and the income from them may fluctuate in accordance with market conditions and taxation agreements and investors may not get back the full amount invested. Both past performance and yields are not reliable indicators of current and future results.

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