The Long Term Investor

I like this little article.

An Overlooked Reason Behind July’s Slowing Inflation
The base effect kicks in.

https://www.fisherinvestments.com/e...rlooked-reason-behind-julys-slowing-inflation

(BOLD is my opinion OR what I consider important content)

"Editors’ Note: Inflation remains a hot political topic, so please understand that our commentary is intentionally non-partisan and focused on the potential market implications only."

"In all the coverage of July’s inflation report, we have seen numerous explanations for why the inflation rate decelerated from June’s 9.1% y/y to 8.5% y/y. There is much chatter about falling gasoline prices. Some argue the Fed’s recent moves are starting to bear fruit. We see an alternative, widely overlooked explanation, and we think understanding it can help investors better navigate inflation’s wiggles over the period ahead.

That explanation: the base effect, which we have long eyed as a likely disinflationary force this year. The inflation rate, as a year-over-year calculation, measures the percentage change between prices in one month and that same month a year prior. The “base” is that year-ago price level, which is the denominator in the calculation. As we all learned in grade school fraction lessons, a higher denominator can result in a smaller quotient—and vice versa. That is what happened in July.

On a month-over-month basis, headline CPI was flat (an encouraging development that we will get to momentarily). But prices in July 2021 rose 0.5% from June 2021. That gives us a constant numerator divided by a larger denominator. Presto, lower inflation rate.

We aren’t pointing this out to talk down the deceleration, which seems to be giving investors some relief. Nor do we mean anything political by going here. Rather, we think there is a good chance that the base effect continues having a balancing effect from here. To see the potential, consider Exhibit 1. It shows the CPI level in 2022 (the numerators) and 2021 (the denominators). As you will see, prices’ autumn 2021 rise will raise the calculation base over the rest of this year. Then, as we head into 2023, early 2022’s sharp rises will move into the denominator, adding more disinflationary math.

Exhibit 1: The CPI Base Effect, Deconstructed



Source: St. Louis Fed, as of 8/10/2022.

Hence, even if month-over-month price changes don’t remain at zero from here, the inflation rate could still moderate. We saw this, to an extent, in “core” inflation, which excludes food and energy prices, in July. On a month-over-month basis, core prices rose 0.3%, matching the long-term average. But the year-over-year core inflation rate stayed at 5.9%, matching June’s reading.[ii] The rising denominator simply canceled out the numerator’s wiggle.

This is encouraging, in our view, because it would be unrealistic to expect month-over-month price moves to stay at zero from here, much less dip negative for a long stretch. After all, it isn’t like prices stabilized across the board in July. That flat month-over-month headline rate stems from a bunch of goods and services’ offsetting energy prices’ -4.6% m/m fall.[iii] We would love it if that fall repeated from here, but that category is notoriously bouncy, which is a big reason the core measure exists. Beyond that, the most likely scenario to us has always been that after the US economy swallowed this year’s big price moves—once energy costs, shortages and shipping bottlenecks worked their way through the system—prices would probably grow more slowly off a higher base. We think July is a real-time example of what this would look like.

Not that the inflation rate has peaked, mind you. Inflection points are only clear with a good amount of hindsight. Food prices are still pretty jumpy, and there may still be some consumer products with petrochemical feedstock where higher oil prices haven’t quite filtered through due to companies’ use of futures contracts to lock in prices. So there may still be a few bumps ahead. Some services businesses may still need to work through staffing shortages, overhead cost increases and other factors that have forced price rises in recent months. Airfares, which mercifully fell in July, may have more wiggles ahead as the world continues inching back to pre-pandemic travel norms.

But July’s results show that even with volatility from month to month, the base effect can still stabilize the headline rate enough to help sentiment improve. That is primarily what matters from an investing standpoint, in our view. Inflation was one of the biggest factors weighing on sentiment during this year’s bear market. From a fundamental standpoint, we think businesses and the economy are equipped to stomach higher prices, considering consumer spending has continued growing on an inflation-adjusted basis this year. But sentiment and reality often veer, creating room for inflation improvement to be a tonic even if it doesn’t represent much for the economy at a fundamental level."

MY COMMENT

YEP....the FED, government, everyone will take credit for any pause or improvement in inflation. Of course most of the time NONE of them deserve any credit. It is simply math. In reality the economy is STILL.....after all this time.....severely disrupted. I would guess we have another 1-2 years to normalize. Of course the "economy" is NOT the stock markets.

 

Yes Smokie.....on a long term chart of the SP500 this little correction will not even be visible. Investors that simply did nothing and sat it out....will be way ahead as usual.

Kind of like a tree falling in the woods.....if you sit through a BEAR MARKET and do nothing....did it really happen.

 

After all the DOOM&GLOOM here is a little bit about second quarter earnings.....at least as you will typically see in the media.

Second-quarter earnings have been solid. Energy gets all the credit: Morning Brief

https://finance.yahoo.com/news/gas-prices-morning-brief-august-12-093345696.html

(BOLD is my opinion OR what I consider important content)

"Second-quarter earnings season is winding down, so we have a decent picture of what went right and wrong in Corporate America during the second three-month stretch of the year.

In the aggregate, things appear to be pretty good. But look just a little bit closer, and the shine starts to come off this outlook.

According to data from FactSet, with over 87% of companies in the S&P 500 having reported earnings, the blended earnings growth rate for the index is 6.7% for the second quarter.

In a vacuum, mid-single digit earnings growth is roughly in line with the average rate of earnings growth over the last 20 years — suggesting the second quarter was a fairly typical period for America's largest businesses. No quarter, of course, exists in a vacuum, and few periods have been as eventful for investors as the second quarter of 2022 turned out to be.

Six of the S&P 500's 11 sectors have reported positive earnings growth in the quarter. But if we take energy out of the equation, the second quarter is a bit more dodgy.

In fact, this growth rate of 6.7% would flip to a decline of 3.7% if energy were excluded from the index.

And energy holds just a 4.4% weight in the S&P 500.

FactSet notes that Exxon (XOM) and Chevron (CVX) together account for nearly half — 44% — of the energy earnings growth seen during the quarter, earning a combined $20.9 billion more than during the prior year period. Profits accruing to the energy sector in the second quarter were $47.7 billion higher than last year; the balance of the S&P 500 has so far earned $31.1 billion more than in the second quarter of 2021. All told, earnings in the energy sector rose 299% from the prior year in Q2.

By the end of Q2, the S&P 500 was sitting in a bear market and had suffered its worst first six months to a year since 1970. The Nasdaq endured its worst opening six months on record.

During the quarter's final month, the price of gas exceeded $5 a gallon nationally for the first time. In June, consumer prices rose 9.1% from the prior year, the most since 1981. Gas prices, of course, help explain much of the boost to energy profitability during the quarter — the price of WTI crude oil traded north of $100 a barrel for most of the second quarter, up from a price in the mid-$60s the prior year.

Just six weeks later, we can see how much has changed for investors.

The Nasdaq is up 20% from its lows. The price of gas is below $4 a gallon nationally. Inflation pressures have shown very preliminary signs of easing. And this Q2 drop in corporate profits also, in part, explains the market's recent rally.

As Keith Lerner, chief market strategist at Truist, noted Thursday, the S&P 500's P/E ratio has expanded from a low of 15.3 in mid-June to around 17.5 today.

A simple way to view the P/E ratio is how much investors are willing to pay for a dollar of earnings. When P/E ratios go up, it suggests investors believe future profits will be higher than current profits; when the P/E ratio falls, it suggests the opposite.

One interpretation of the recent rally in stocks, then, is that investors think the worst is over for this recent contraction in corporate profits.

The problem with this argument? Earnings estimates for the S&P 500 are trending lower.

That creates a head-scratching situation for markets as we head into the final few months of the year.


Earnings estimates have been declining during the market's recent rally. (Source: Truist)
"The entire rally witnessed since mid-June has been driven by valuation expansion," Lerner said Thursday. "This increase was partly based on hope of a Fed pivot to a less aggressive policy stance and a sharp pullback in the 10-year U.S. Treasury yield. Such a pivot seems less likely near term given the very strong employment report from last week."

A week ago, we learned the U.S. economy added 528,000 jobs in July, not exactly the kind of data that calls out for the Fed to change course on raising interest rates.

All else equal, lower interest rates make stocks more attractive and easier Fed policy means lower future interest rates — a textbook setup for stocks.

Declining earnings growth, however, would suggest just the opposite and challenges the case for higher stock prices.

In Lerner's view, the balance of risks indicates an earnings slowdown will win out over hopes for the Fed to change course. "We reiterate our view that this is a more reasonable place for investors who are over-allocated to equities to trim exposure," Lerner said.

And the recent slide in oil prices suggests energy won't be able to save the day in the quarters ahead."

MY COMMENT

This article is the perfect example of how the MEDIA takes good earning and stretches everything they can to downplay and fear monger. About 70+% of companies that reported BEAT expectations.

The FACT is that the earnings totally blew all the experts predictions out of the water.

The BIG predictor for 3rd quarter earnings.......the so called experts predictions are trending lower. What a joke. Fortunately for actual investors earnings are not based on predictions of the......nearly always wrong......experts. They are based on the actual fundamental business results of REAL companies.

Personally I am very much looking forward to 3rd and 4th quarter earnings.

 

Here are a couple of articles that reinforce each other:

Stock market news live updates: Stocks rise as Wall Street heads for winning week

https://finance.yahoo.com/news/stock-market-news-live-updates-august-12-2022-111813368.html

AND

U.S. consumer sentiment up more than expected in August, survey shows

https://finance.yahoo.com/news/u-consumer-sentiment-more-expected-142434897.html

The first article notes that the SP500 will be UP for 4 weeks if we end this week positive. BIG WOW. It might be more significant if they mentioned that the SP500 has been POSITIVE for about 3.5 MONTHS now.

As to Consumer Sentiment. Totally irrelevant to a long term investor.

 

I have to post this.....

Outgoing Whole Foods CEO says young people ‘don’t seem like they want to work’ and thinks ‘socialists are taking over

https://finance.yahoo.com/news/outgoing-whole-foods-ceo-says-210054682.html

(BOLD is my opinion OR what I consider important content)

"If you ask Whole Foods’ outgoing CEO about socialism and young workers, he says there’s a revolution happening, and it’s not with pitchforks but with words.

Whole Foods cofounder John Mackey has a history of complex views that he’s shared over time. What Mackey likes: a vegan diet and free-market and libertarian ideals. What he doesn’t like as much: processed and frozen foods, unions, and being silenced.

An Ayn Rand lover who once cut his own salary to $1, Mackey’s dichotomy earned him the title of a “right-wing hippie” in a 2010 New Yorker profile. As a longtime fan of capitalism, he continued his crusade against socialism in the latest podcast from Reason, the long-running libertarian magazine.

“Socialists are taking over,” he said on the podcast. “They’re marching through the institutions. They’re taking everything over. They’re taking over education. It looks like they’ve taken over a lot of corporations. It looks like they’ve taken over the military, and it’s just continuing.”

Mackey stated last year that he’ll retire this coming September, and he told Reason that he’s “muzzled myself ever since 2009,” seeming to refer to a Wall Street Journal op-ed from that year in which he compared the Affordable Care Act to fascism.

And it’s not just the socialists irking Mackey; it’s also the kids these days. “They don’t seem like they want to work,” Mackey told Reason about younger generations in the workplace.

“Younger people aren’t quick to work because they want meaningful work,” was Mackey’s diagnosis of the problem, referring to the well-known importance to Gen Z of finding work with some kind of social significance. This is a mistake, he said. “You can’t expect to start with meaningful work. You’re going to have to earn it over time.”

He adds that there’s a price you have to pay to get to meaningful work and some younger generations aren’t willing to make that sacrifice.

Since the oldest members of Gen Z entered the workforce, they’ve become known for not exactly enjoying work, as movements such as #antiwork have arisen, born out of the idea that one’s identity starts outside the place of employment.

The idea that your workplace should be aligned with your personal, private values has gained popularity of late, especially with younger employees. A whopping 80% of Gen Zers want to work for an employer that lines up with what they believe in, according to a Linkedin survey. A job that accords with an employee's values and interests seems far less important to other generations, clocking in at only 59% of millennials, 49% of Gen Z, and 47% of baby boomers.

Younger generations have often been seen as more relaxed or lazy by older workers; just look to Gen X’s trajectory. Mackey even admitted in the Reason podcastthat while he used to say his dad didn’t understand his generation, he now finds the shoe on the other foot.

“I feel like I’ve become my father: I don’t understand the younger generation,” he says. In contrast, Mackey says, he “couldn’t wait to work” and be able to earn money.

Years ago, Mackey actually went on the record in favor of values-based leadership, writing a book on the subject. He’s also a part of the so-called Conscious Capitalism movement, a group that believes business is a social good and that should purposely lead with a higher cause or mission in mind.

While insisting that capitalism can remain socially conscious and serve all stakeholders, Mackey has been an outspoken critic of socialism for well over a decade, as evidenced by his 2009 comments during the Obama administration, although he has publicly admitted regretting some of his statements.

In 2020, he called socialism “trickle-up poverty” at the same time as he called capitalism ‘the greatest thing humanity’s ever done,’” sadly neglecting to mention the invention of Whole Foods’ off-brand Oreos.

If his comments to Reason are anything to go by, in six weeks the world may be about to hear more of Mackey, unmuzzled."

MY COMMENT

YES.....I totally agree. We are seeing a very strong resurgence of Socialism over the past 10-20 years. Recently we have seen a change over in South and Central America that has picked up steam over the past 36 months. The EU....basically a LOST CAUSE except for a few of the Eastern countries.

Agree or disagree.....that is your right....at least in "some" countries. Probably NOT in England anymore.

But than.....I am a CYNIC when it comes to human behavior.

 

As I have been typing and reading....the markets are hanging in there with a slight bit of slippage......WHATEVER.

 

Today will be a good day regardless of the markets. I have a nice little show to do tonight after about a 100 mile road trip. It is outside....as usual in the summer heat.....but that is the way it is.

I also have the art shippers coming to my house soon to pack and take a painting to exhibition. I have had a good year for my little art collection this year. A number of paintings have made it into exhibitions. That is what good art is for.....to share during the short time that you are it's temporary guardian. Most of the art that I collect ranges from about 120 to 90 years old.....at least with the IMPRESSIONISTIC oil paintings. I have no illusions that I "OWN" these items....my role is to safeguard them for the time that I am their protector.....and send them on their way from there. If they tend to add to my net worth....that is a side benefit.

A few weeks ago I completed additional research on one of my paintings. I discovered a new.....to me..... archive of old newspapers that have been digitized and found over 350 articles that referenced the artist. So being a fanatic......I pulled up and read every one of them looking for additional materials to supplement my research on one of my paintings.

Out of that quantity of articles, in many different newspapers, I did find TWO references to a painting that I own. It was worth the time and effort since I have now documented two previously unknown exhibitions of this particular painting back in 1927. This painting was my "COVID" project. I decided to try to research it during the Covid lock-down. It's history was unknown. I have now....against all odds....been able to identify the name of the painting and an extensive exhibition history back in the 1920's.

That recent research also led me to article that listed the cemetery for this particular artist. I had tried to find his grave site previously but there was NOTHING on the internet. After finding the information on the cemetery, I called them and verified that he is in fact buried there. My wife and I made a trip to the cemetery to get some photos of the grave. It was an extremely confusing LARGE 115 year old cemetery. We finally located the grave in an old area....but....the headstone was missing. It was an unmarked grave.

Over the next few weeks I was able to discuss this with the cemetery as well as the descendants of this historic artist and progress is now happening to get a stone on the grave. I will NOT say who the artist is....but it is amazing to me that such a national figure would be in an unmarked grave.

I am sure there was a stone there originally. There is a dry creek bed along that area of the cemetery. I am sure in the "old days" it would routinely flood when storms rolled through. That is probably why many graves in that area of the cemetery are missing stones.

 

Yeah Smokie. Locating that grave with no headstone......made me wonder how many other historic figures are out there in unmarked graves.

 

A VERY satisfying day and week for me this week. Definitely a GREEN week and today was a nice medium/high day for my account. I was TOTAL green today with my ten stocks. I also beat the SP500 by 0.40% for the day. My BIG winners were TSLA up by 4.68% and NVDA up by 4.27%. My WORST holding....worst being relative.....was COST up by 0.94%.

This day today confirms the strength of the markets lately and will be a good positive indicator for the markets going forward.

 

The BIG CAP GROWTH STOCKS are making a run up. The very good news....they STILL have a long way to go. The markets are ON FIRE......and....it is likely to continue.

DOW year to date (-7.09%)
DOW for the week +2.92%

SP500 year to date (-10.20%)
SP500 for the week +3.26%

NASDAQ 100 year to date (-16.88%)
NASDAQ 100 for the week +2.71%

NASDAQ year to date (-16.60%)
NASDAQ for the week +3.08%

RUSSELL year to date (-10.19%)
RUSSELL for the week +4.93%

Here we have the SP500 and the RUSSELL about to fall out of correction territory. Another GREAT week for investors that had the GUTS and foresight to simply sit though the past 6 months and do nothing. I am fully invested all the time.....but...those that have added money over the past 6 months are probably seeing a nice payoff depending on what you purchased.

A really nice way to go into the weekend. REST UP. It will probably be a typical WILD WEEK next week. The MOMENTUM has got to be on the positive side.

 

Here is REALITY for long term investors.

How to Think About Investing During a Recession

https://compoundadvisors.com/2022/how-to-think-about-investing-during-a-recession

(BOLD is my opinion OR what I consider important content)

"Is the US economy in a recession?

Everyone seems to be asking that question.

Why?

Likely because we just learned that real GDP contracted for the second straight quarter. And the last 10 times we’ve seen consecutive quarters of negative economic growth, the US was indeed in a recession.


Note: Recession column as defined by NBER
With data going back to 1947, we’ve never seen a 2-quarter decline in real GDP of this magnitude (-0.63%) without the US being in a recession.


Still, many are not convinced, pointing to the jobs data which continues to be strong. The US Unemployment Rate has moved down to 3.5%, back to pre-pandemic levels and at a 53-year low.


And so, the heated recession debates will likely rage on until we get an official announcement from the National Bureau of Economic Research (NBER) or see a sharp turnaround in growth.

All of which is creating further angst among investors, who have already faced the most difficult start to a year in recent history.


And angst is not a particularly good emotion to have, as it tends to precede actions (like panic selling) that can be deleterious to the long-term health of your portfolio.

Which begs the question: what should an investor be thinking about as it pertains to recessions? Here’s a few things to consider…

1) Recessions Happen

Since 1871, there have been 30 recessions in the US, averaging one every five years. And in spite of that fact, the S&P 500 has gain 6.9% annualized over that time, after adjusting for inflation. There’s been no better long-term builder of wealth in the last 150 years, and recessions are a necessary part of the package, for there’s no upside in investing without intermittent downside.


2) Timing Isn’t Everything

Still, wouldn’t it be better to sidestep recessions and related stock market downturns altogether? It certainly sounds tempting.

Let’s say you were the best economist that ever lived. You knew exactly when recessions would start and end in advance, moving to cash (3-month Treasury bills) during recessions and stocks only during expansions.


What would your returns have looked like since 1928?

10.6% per year versus 9.7% for buy-and-hold.

Not bad, until you dig into the data and see that all of this outperformance came from avoiding the bulk of the losses during the Great Depression (when stocks declined 86%). Since the Depression, if you were able to time every single recession perfectly, you would have had underperformed with a 10.6% return versus 11.7% for buy-and hold.

In reality, no one could’ve predicted every recession with such precision. Let’s say instead that you were early in getting out, moving to cash a year before the recession and getting back into stocks a year after it ended. Or more likely, let’s say you were a little late and moved to cash six months after a recession started and moved back into stocks a year after it ended.

That would still be pretty remarkable timing. How would these scenarios have fared? Worse than a simple buy-and-hold, and this is not factoring in transaction costs and taxes, which would skew the results further in favor of doing nothing.


How can that be?

The stock market is not the economy. It often starts going down before the economy turns south and starts turning back up before the downturn ends. Getting that timing right on both ends is nearly impossible, and in trying to do so you’re likely to cause more harm than good.

3) Don’t Wait for the Robins

Maybe you can’t time a recession, but why should you invest new money when the economy is contracting? Wouldn’t it be better to wait for the news to improve and the downturn to end before adding to your portfolio?


Historically, the answer has been a resounding no.

During the last 6 recession, the S&P 500 has gained an average of 61% from its low by the time the official end of the recession was declared by NBER.


In October 2008, during the worst recession the US had experienced since the Great Depression, Warren Buffett famously penned an op-ed entitled “Buy American. I am.” He made the case for investing in equities despite all of the terrible news of the day, saying that if you “wait for the robins, spring will be over.”

4) Stay Diversified and Don’t Fight the Last War

During bear markets and recessions, there’s a tendency for correlations to rise, with many assets moving in the same direction: down.

Inevitably, something will buck that trend, and move in the opposite direction. While it’s tempting to abandon your diversified portfolio and go all-in “what’s been working,” that hasn’t been a prudent strategy in the past.

During the pandemic recession in 2020, the Volatility Index ($VIX) spiked to its highest closing level ever by mid-march (82.69), and the VIX futures ETN ($VXX) had more than quadrupled on the year. Naturally, demand for such “hedging” products soared, as investors feared the worst was yet to come.


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But the worst was actually already over, and the $VIX would soon plummet. As volatility declined, so did the $VXX, and those who fought the last war were taught a valuable lesson once more.


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This year, inflation is the biggest concern for most investors, and the only thing “working” has been commodities. Loathed back in 2020 when Crude Oil futures turned negative, the opposite sentiment prevails today as “inflation hedges” have become the most popular vehicles of choice. While having a percentage of your portfolio in assets that may benefit from periods of higher inflation is certainly reasonable, going all-in on a single commodity after a huge runup is not nearly the same thing. Don’t fight the last war.


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But What’s the Answer?

I know what you’re thinking. This may be a prudent exercise for long-term investors to think about, but you still want to know: is the US economy in a recession?

Since there’s no precise formula that the NBER uses, there’s no way of knowing the answer with any certainty. But if you’ve taken away anything from this post, it should be this: from an investment standpoint, the answer doesn’t really matter.

Markets move first, and they’ve already adjusted to an increased probability of a recession with a 23% decline in the S&P 500, 33% decline in the Nasdaq Composite, and many high growth stocks cut in half or more (note: total return using closing prices).

Is that enough? No one knows. We’ve seen recessions in the past where the S&P 500 has declined less (most recent example: 1990-91 recession) and many during which the S&P 500 has declined more (most recent example: 2020).

The one constant is that all recessions and bear markets of the past have ended, with new expansions and all-time highs following at some point in the future. With all the things to worry about today, that should be a comforting thought for long-term investors. Historically, if you stayed the course, you were eventually rewarded. And that’s been true regardless of whether the economy was deemed to be in a recession.

“You get recessions, you have stock market declines. If you don’t understand that’s going to happen, then you’re not ready, you won’t do well in the markets.” – Peter Lynch"



MY COMMENT

The ONLY way to capture and compound the long term market gains is to be invested in the markets. Since market timing is IMPOSSIBLE.....that means being fully invested all the time. In actuality most 401K and retirement investors are doing just this.

The current markets are a perfect example. We just sat through a DISMAL start to the year and losses in the neighborhood of (-30%). BUT.....now here we are with the SP500 at about (-10%). We actually have a shot.....perhaps a long shot....at ending the year positive. the POWER of long term investing.

 

I have now reached a MULTI-MONTH high in my portfolio. I am still well off my all time high....I am guessing about 13-14%. No I did not calculate it....I am estimating. BUT....I have a HUGE amount of room to run in my BIG CAP ICONIC stocks. the cream of the crop of business in the entire world. When the recovery is complete.....no matter when it is....I have no doubt that I will be at new ALL TIME HIGHS.

 

HAPPY WEEKEND EVERYONE....as the markets continue to.....SHOW ME THE MONEY.

 

A nice little article on the 2nd quarter earnings.

Q2 Earnings in Focus
They mostly just confirm what sector returns already reflect.

https://www.fisherinvestments.com/en-us/marketminder/q2-earnings-in-focus

(BOLD is my opinion OR what I consider important content)

"Q2 earnings season is winding down, with the vast majority of S&P 500 companies having reported. The results? Three-fourths of those reporting so far beat expectations, and revenues did much of the heavy lifting. Yet while Energy earnings soared, profits in the other 10 sectors overall fell, echoing the split among sector returns during the bear market. We think this is a good reminder that stocks look forward.

As Exhibit 1 shows, sector returns from their early peak this year through the year’s low point to date on June 16 mostly previewed how earnings turned out. While S&P 500 earnings overall rose 6.7% y/y, much of that came from Energy earnings soaring 299.2%. Excluding Energy, they fell -3.7%. So while headline earnings growth was near its 7.1% annualized average historically, it masks some underlying weakness.[ii] Yet first-half sector returns largely captured the earnings dynamic below the surface, with only Energy positive through Q2. Markets anticipated high oil prices’ impact on Energy earnings well in advance of official reports.

Exhibit 1: S&P 500 Sector Returns, 1/3/2022 – 6/16/2022

Source: FactSet, as of 8/11/2022. S&P 500 sector total returns, 1/3/2022 – 6/16/2022.

Note that we aren’t arguing the bear market fell on earnings weakness outside Energy—in our view, sentiment, not fundamental problems, was the bear market’s primary contributing factor. Moreover, while investors’ anticipation of high oil prices driving big earnings growth probably drove Energy’s singular outperformance, it isn’t as if non-Energy sectors’ earnings fell and surprised negatively across the board. Excluding Energy, five sectors’ earnings rose (Industrials, Materials, Real Estate, Health Care, Tech), and five fell (Financials, Consumer Discretionary, Communication Services, Utilities and Consumer Staples). Of the former, Industrials, Health Care and Tech earnings are coming out ahead of consensus expectations at Q2’s end. Meanwhile, Financials, Consumer Discretionary and Communication Services earnings have been materially worse than expectations indicated.

But there are some nuances here as well. For example, Financials companies’ setting aside loan loss provisions due to a new accounting rule appears to be driving the sector’s earnings negativity. However, this is mainly precautionary—whether actual loan losses result is questionable—and releases could boost earnings later. To see how distortionary this may be, S&P 500 earnings excluding Financials would be 14.2% y/y, more than doubling the headline growth rate.[iii] As for Consumer Discretionary and Communication Services, it isn’t a secret categories that saw huge growth during the pandemic (e.g., Internet & Direct Marketing Retail) are giving some of it back as travel and in-person services industries (like Hotels, Restaurants and Leisure and Automobiles) resume normal operations. In Communication Services, Interactive Media & Services drove its earnings decline as businesses’ online advertising failed to match last year’s strong post-COVID boom.

With Q2 earnings more mixed under the hood, the narrative that only Energy is seeing profits at the expense of all else breaks down. Also notable and cutting against widespread inflation and energy price-fueled recession fears: Every sector’s revenues rose in Q2. S&P 500 revenue growth was 13.6% y/y, and even excluding Energy, sales rose 8.8%.[iv] Corporate America has varying degrees of pricing power, but we think this demonstrates its overall resilience—and why stocks typically keep up with, or outpace, inflation over time (notwithstanding this year’s bear market, of course).

Overall, stocks seem to be looking beyond Q2’s pockets of earnings weakness. While markets swing on sentiment in the short term, over the longer term they look forward 3 to 30 months and assess how likely earnings outcomes compare with present expectations. Since June 16, the market’s assessment of future reality seems to have shifted markedly—if not turned a corner. Exhibit 2 shows Energy down -2.1% since stocks’ year-to-date low point, as crude oil’s price has fallen -25.7% from its March 8 peak.[v] It seems likely to us that markets are suggesting it may be harder for Energy to beat expectations. Conversely, though, the gains for every other sector since then suggest the expectations bar was low for them, particularly the ones hit most in the first half. Judging by ongoing earnings skepticism amid widespread recession chatter, a big gap between expectations and reality still exists.

Exhibit 2: S&P 500 Sector Returns, 6/16/2022 – 8/10/2022

Source: FactSet, as of 8/11/2022. S&P 500 sector total returns, 6/16/2022 – 8/10/2022.

We don’t know whether stocks’ rally from mid-June will mark a bull market recovery. That can be said only in hindsight, but it appears to us the conditions are in place. Sentiment remains dour, yet the evidence increasingly shows expectations have overshot reality to the downside. From here, we think that is what matters for stocks’ direction going forward: How will Q3 earnings—and beyond—fare against expectations? In our view, that is what investors should be focusing on, too."

MY COMMENT

The 2nd quarter is now hindsight. We did better than expected and we move forward with a positive tail wind. I actually LOVE to see all the dire predictions that are already piling up for the 3rd quarter. The more extreme the predictions the easier to BEAT.

My early prediction for the 3rd quarter.....similar to the second quarter but BETTER.

 

You making some good money in this little RALLY....Zukodany?

I actually hope that I am making some money researching the art. The more I can document provenance, history, and exhibitions for a painting.......the better market value it might have in the future. It is just about impossible to find any information on a 100 year old painting with no name or history. There was something about that one painting that I researched....it just seemed to be of the size and quality to be a significant painting. I was extremely lucky to find what I found.

All together I went through a total of about 800 newspaper references to the artist between about 1925 and 1936. The various newspaper archive sites online are an amazing resource. The two that I used the most were.....newspapers.com and newspaperarchive.com.

 

Yes Zukodany....in a reference to a CLASSIC post from the obscure past......"my posting privileges should be revoked".