Navigating a MinefieldApril 12, 2022
In this quarter’s strategy report, Navigating a Minefield, we discuss the following:
-The Fed is tightening into a growth slowdown. Unlike in 2015, the Fed has just lifted off while the ISM Manufacturing is contracting and real GDP estimates for 2022 are steadily falling. If the FOMC sticks to its schedule of economic projections, the 2022-23 tightening cycle is set to be as rapid as Greenspan’s 1994-95 tightening cycle. But they do also recognize the possible downside risk to growth if they stick to their tightening schedule.
-The Fed increased the size of the balance sheet from roughly 20% of GDP to over 37%. It will take them through the end of 2028 to get their balance sheet back to 20% of GDP.
-The current surge in inflation has historic precedents. On average, inflation falls about 3% 12 months after peaking.
-Recent high frequency stats are definitely showing a slowing trend coming out of China. Concerns about government interference, growth, the property sector and COVID have led the China Policy Uncertainty index soaring. Is a weakening Yuan a prospect?
-Earnings season is coming up in the next couple weeks and it is crucially important for companies to turn in a good performance. While analysts were decreasing EPS estimates in aggregate for the first quarter, they were also increasing EPS estimates in aggregate for the next three quarters. The bottom-up EPS estimate for the second quarter increased by 1.6% (to $56.07 from $55.16) from December 31 to March 31.
-Over the last 20 years, April has shown the best monthly return of the year for the S&P 500: 2.41%.
-We conclude with a group of spotlights on innovative companies around the world.