QUOTE OF THE WEEK
“Kind words are the music of the world.” – F. W. Faber
Corporate Earnings Season is Starting
First quarter earnings season has already started and will last through Memorial Day. Some banks have already reported showing big banks doing well and some small banks not so much. As far as the banks are concerned, the Fed has stepped in giving them access to a lending window should they get into trouble if depositors start to make a “run on the bank”. So as of now, it appears banks are safe.
The big concern for the economy is that because of the failure of Silicon Valley Bank, which has led to transfers of deposits from smaller banks to larger banks, they are now reluctant to make loans that would deplete their capital. Even the big banks are cutting back on loans. For example, Bank of America, one of the two biggest banks along with J.P. Morgan, has cut back on loans. Bank of America loan volume has dropped over the last three quarters by 12%, 10% and 7% respectively. Without the access to loans, businesses are restricted in expanding and often are facing restrictions in day to day operations.
We are now in the part of the economic cycle where GDP (Gross Domestic Product), inflation, and corporate profits are declining. The question is how will this part of the cycle affect the stock and bond markets? The easy answer is if inflation is declining the bond market will do well because interest rates should decline. This is what we are expecting to happen and when we start to see declining rates, we will move into the bond market.
As part of this cycle and if corporate profits start to decline, the stock market will do poorly. Remember, stocks rise when profits are rising and stocks decline when profits are declining.
All indications show that we are beginning a corporate profit’s recession. The combination of banks being less willing to lend and a slowing economy, we see hard times ahead for the stock market.
Even though it is early in the corporate earnings season we are getting an indication of where we are headed. For example, using the Nasdaq 100 which is made up of the largest 100 companies in the Nasdaq Index, nine of the 100 companies have reported earnings. The composite earnings of those nine companies are down -38.3%. We won’t have the entire picture of this earnings season for a while but the trend of the data so far is recessionary.
Sources: Yahoo Finance, Hedgeye, Arizona Daily Star, Bloomberg, NPR,