The devil is in the details

It was another wild ride for stocks on Friday as bearish sentiment quashed an early rally running indexes into a deep rout, only to rally into the final bell for a mixed close. The S&P was in bear territory during Friday’s session, but it managed to find its way out by the end of the day.

What time is it? It’s not a Wall Street saying but many of us have heard that “the early bird gets the worm.” I suppose the adage can be applied to Wall Street when it comes to investing, as there is a clear benefit to getting into a trade before the masses jump in…assuming that your thesis is a correct one. A near cousin to that saying is “timing is everything.” Same with this as the former, if you get in early, you have more potential upside…or downside if you are wrong. Let’s talk about timing for a bit. We all watch economic data and corporate earnings attentively, but what do they actually tell us about the situation on the ground, today? Unfortunately, in most cases, not much.

Consider this example. Later this week, we are going to get GDP numbers from the Bureau of economic analysis. Now, if you just simply tune in on Thursday at 8:30 AM, Wall Street Time, you may hear that GDP shrunk by -1.3%. You may drop your half-eaten toast on your lap as you break out into a cold sweat. Now, let’s just say that no matter how you look at it, a fall in GDP is never a good thing. Pick up your toast, brush off the crumbs, take a sip of your juice, and listen carefully. That GDP figure is the second revision of the GDP in the first quarter…as in the one that ended on March 31…you know, like almost 2 months ago. The “second revision” moniker means that the bureau has factored in any new information that has rolled in since its first revision, mostly an estimate, released last month. That first revision came in at -1.4% after economists were expecting a +1.0% gain. You may remember that I walked you through that number, explaining that it was negative largely due to the US importing more and exporting less, due to current geopolitical climate. The largest part of GDP, Consumption grew at a faster pace than the prior quarter…you know the one that ended December 31, 2021.

Let us take it one step further. We are currently in the very final stages of earnings season, which has thrown us many ups and downs. Similar to GDP, this earnings season was for Q1, which ended in March. Really then, how useful are these numbers, after all? Last week, we witnessed some precipitous drops in the Consumer Discretionary stocks, specifically brick and mortar retailers. In fact, those earnings releases caused the broader markets to fall to uncomfortable lows. Imagine if you asked your friend how the [insert your favorite baseball team name here] are doing, and your friend quotes you 2021 season results, even though we are in the midst of the 2022 season. That can’t be useful, right? Ok, I am setting you up. On the surface, it may not be useful, but if we had a bit more context, perhaps we can find some clues that will help. In corporate earnings, beyond the beat or miss, companies will often update us on the current quarter and let us know if they are on track. Further they may even give us some full year guidance. Both are good bits of “early bird” information, but the non-numeric commentary is often the best information. In the case of Target’s release last week, the company missed on its EPS estimates…by a lot. That is clearly not good, but that was last quarter, everyone misses now and then. Interestingly, the company beat Revenue estimates, but what can that mean? It means that the company’s margins are shrinking. The company explained that the miss was attributed to higher labor costs and increased shipping costs. Additionally, consumers, now faced with foregoing higher margin wants for lower margin needs due to food inflation. That is not good either, but it still represents a snapshot of last quarter. The company further warned that it expected the margin pressure to continue over the next few quarters. Now THAT, is not good. The company is telling us that those conditions remain through the current quarter…which ends at the end of next month. Inflation is now…or has been…a factor in corporate profitability. This shouldn’t come as a surprise as inflation has been on the rise for a little over a year now. We knew about rising shipping costs and food products for some time now, and if you were truly an early bird, you might not have been so surprised last week.

One final thought. Today is Monday, which means that I will attach the economic calendar for the week ahead. If you have opened it in the past, you would note that I share the period of the number. Looking down the calendar for the week ahead, I note that only 4 releases on the list are from the current month with the remainder reporting on activity in April…except for 1, GDP…from last quarter…ended March 31…the second revision. These numbers can certainly illicit immediate market reactions, but the reality is that most of what we learn has already been priced into the market…the early birds have made sure of that.

LAST FRIDAY’S MARKETS

Stocks swooned from early gains with the S&P touching bear market territory, but ultimately rallied into the close, erasing larger, earlier losses. The S&P500 gained +0.01%, the Dow Jones Industrial Average rose by +0.03%, the Nasdaq Composite Index lost -0.30%, and the Russell 2000 Index declined by -0.25%. Bonds gained and 10-year Treasury Note yields fell -5 basis points to 2.78%. Cryptos lost -2.0% and Bitcoin gave up -3.68%.

NXT UP

• Chicago Fed National Activity Index (April) may have risen to 0.50 from 0.44 in March.
• In the week ahead: More corporate earnings along with flash PMIs, housing numbers, Durable Goods Orders, GDP, FOMC Meeting Minutes, PCE Deflator (this is an important one), and University of Michigan Sentiment. Please refer to attached calendars for details.