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It’s All About Earnings & The FED April 9, 2022

Posted by Tom in Thoughts.
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April 8, 2022 – I get asked “Why isn’t the stock market recovering (fast)?  Must be (fill in the blank, usually political)!”  Actually it’s all about earnings (a.k.a. profit), now and in the future.

The market likes constant / stability.  Stable good or bad is OK as long as “they” (investors) can evaluate what it is and what it affects in the market.  Thus money rotates were it will do best in the future; or at least everyone’s best guess of the future.  With unemployment low and the economy on fire why aren’t we roaring to all-time highs?  The unknown is the answer, and that’s what makes Wall Street very uncomfortable.  So much so that the big guys / gals buy Put options and Futures to hedge (protect) their portfolios.  These instruments have expiration dates and must be “unwound” before those dates.  That means volatility during the settling process.  Then the question is will that protection be renewed / rollover again.  Make no mistake about it, options and futures activity does affect the stock market.  And big pension portfolios & mutual funds need a lot of these to offset their holdings; billions in short order.

Now getting back to market concerns and future corporate earnings.  Companies big and small are faced with a rapid increases in demand and a limited supply.  “Happy days are here again” style demand came very quickly via Covid case drop offs, that with many having added savings in the bank created demand, a.k.a. “Back to Normal”.  But companies have limited supplies.  They are faced with limited labor, higher wage demands, supply chain issues and higher costs.  With inflation concerns by the consumer being an issue, can they raise prices or absorb these problems without affecting profits?

I’m thinking that the FEDs policy on May 4 could be a significant event.  The markets have priced in interest rates rising, but how much and how fast?  The bigger issue is under the surface, and that is liquidly.  The FED has purchase soooo much public and private debt that it intends to sell (or retire) back into the markets.  How fast that happens will definitely affect liquidity in the capital markets.  Note the sudden spikes in the FED balance sheet chart below. 

There is a lot of money / capital up in that chart that the FED intends to deal with to fight inflation.  Just how they go about doing it is a key factor for the future.  I don’t know and the markets don’t know either; “unknown”.  Liquidity,  the availability of capital, is the life blood of a capitalistic economy and  that’s why this matters.  That’s the reason why the next FED meeting and the current corporate earnings projections will be important.  Current earnings should be “OK” but the forecast of earnings will be something that everyone on Wall Street will be closely watching.

What next?  The war in Ukraine is terrible, but basically a “known”.  COVID is rising is some areas, but now we have therapeutics; “a known”.  Domestic politics continue; “a known”.   Back to the “unknown”.  I think corporate earnings / profits will be OK to good this quarter.  The markets will like that short term.  Thus a possible scenario would be a rise toward the previous high (though not making it) into the May 4 FED meeting.  Then my feeling is it could drop back to test the previous lows.  And many will be surprised and left holding “the bag” near the top. In the mean time we have to trade the chart in front of us and look at it with an open and unbiased mind (difficult!).   The table below shows what is happening in the Short Term with sector rotation.

Well . . .  that’s my big picture forecast for now.  Have a good week.           ………  Tom  ………..

table by High Growth Stock Investor, used with permission.

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