Investment Insights

 — Steve Orr 

Rewind

Most U.S. indices slid a percent or two last week. Not enough for a trend change, just grinding back and forth in a roughly 3% range waiting on earnings news. We sit about 7% above the recent bottom set on Monday, April 7. Our charts suggest that a retest of that low should take place later in the June/July timeframe. As we go to press, Mr. Market appears to be accelerating that schedule. Early trading is pushing all of the major U.S. indices down at least 2%. Welcome back to volatility and uncertainty over tariffs, future government funding and wars.

The media line for the push lower in stock prices is that Trump is fighting with the Fed on interest rates. Historians may recall the number Nixon did on poor Arthur Burns, who headed the Fed at the time. Presidents griping in public and private about the Fed’s handling of interest rate levels is nothing new. What is new is how at least two regional Fed presidents (Goolsbee and Williams) have come out against the administration’s policies in recent speeches.

We chalk a lot of that back and forth up to noise. Trump needs someone to blame and keeping Chairman Powell around gives him a convenient, if tired, target. The firing of a principal officer at a congressionally created agency is still a bit of a legal dark area. We think Trump has enough issues at the moment in dealing with 15 countries on tariffs plus Congress.

The lack of certainty makes the risk-off decision for traders relatively easy. Sentiment is lousy, the trend is pointing lower and valuations, namely price-to-earnings ratios, are still overvalued. Ergo, sell and go to cash for the fast money. For longer-term investors like us, picking spots to get involved is second nature; opportunities are coming.

Real world

Back in Realville, aka the actual economy, sentiment and expectations are down in rotten territory. The theoretical folks would say, “The range of outcomes has broadened to a wide range.” In normal speak, after tariffs, five wars and D.C. drama, no one knows what will happen.

The hard data from March suggests consumers are still spending as retail sales and credit card usage held steady. Jobless claims and employment data also suggest a steady economy. Import levels from shipping companies suggest that the big wave of toys, shoes and other goods rushed ahead of tariffs is over. Shipping loads and overseas container pricings are coming down.

The survey or soft data coming in from the regional Fed banks leans toward slowing activity in the coming months. Four short months ago buiness attitudes were very optimistic. Taxes were going to stay the same, regulations were going to be cut and the sun was shining on the future. Now skies are dark with foreboding – who can I contract with; what will my costs be? Keeping tax rates steady is in the budget bill but that appears to be a late summer vote, if at all. As a result, businesses around the country are either sitting on their hands or canceling some orders.

NABE and regional Fed Bank surveys show that firms are planning on cutting their capital expenditures over the next year in response to the uncertainty. This matters for future earnings and GDP! The Chief Executive website recently posted its CEO survey, conducted April 8 to 10. That was right during the tariff “pause.” The article says it best: 

“Overwhelmingly, CEOs in our April survey said the president’s global tariff regime was responsible for their failing optimism. Two-thirds (67 percent) said they do not approve of the tariffs, and 76 percent said they would negatively or very negatively impact their businesses this year.” (“Tariffs Push CEO Confidence To Multi-Year Low In April Poll”)

The White House did announce early Monday that the president will meet with CEOs from Walmart, Target and Home Depot later that day. We suppose tariffs may come up in the conversation. Let us put the economy in the neutral zone for now: downshifting to first gear, but definitely not teetering on recession.  

As planned

Earnings season kicks into high gear this week. Results so far: on plan. S&P 500 companies are on track to grow earnings approximately 7% over 2024’s first quarter. The market’s drop in price over the last month has improved the index’s P/E ratio to 19x, down from 22x. Unfortunately, nine of the 500’s 11 sectors are expected to report lower earnings over the next two weeks. Lower earnings will push that multiple back toward 22x.

This week and next 291 S&P 500 names will report, so by month’s end we will have a pretty good handle on earnings growth and, more important, managements’ outlook for the rest of the year. Tariff impacts from Tesla on Tuesday and Hasbro on Thursday should be, ah, interesting. Pool and Tractor Supply should give us some insight on consumer luxury spending plans.

Over in the necessities (staples) sector we will hear from Pepsi, Procter & Gamble and Colgate-Palmolive this week. Pepsi, like Hasbro from China, should also garner tariff attention as virtually all its concentrate for Pepsi-Cola and Mountain Dew is made in Ireland. “Do the 10%” instead of “Do the Dew.”