The Weekend Edition # 106

Welcome to another issue of the Weekend Edition.

Thank you to all who’ve read and welcome to all the new subscribers this week!

Here’s what we cover:

• Market Recap - Tough Quarter

• Macro - World Trade Volume

• Earnings Season Q3 - Factors to consider

• The Week Ahead - Economic & Earnings Calendars

• Closing Thoughts - Conflicting Stories

Let’s dive in ⬇️

Market Recap - Sep 25 - Sep 29, 2023

The week ended more or less flat but, this certainly was a difficult month for the markets. From a technical standpoint, all the major indices are below their 50-day moving average while the Russell 2000 small cap and the Dow Jones Industrial Average (DJIA) have dipped below their respective 200-day moving average. The big discussion is now whether the S&P500 takes out that level as it’s barely 2% above its 200-day moving average. This would be a signal for a bearish outlook.

Seemingly, the poor performance has not been restricted to just the week or the month. Globally, markets have not had a great quarter with the majority of downside performance coming in August and September.

The major news that is driving global markets remains rising oil prices and higher yields. We’re seeing markets adjust to the higher-for-longer tone set by the Fed and yields are rising commensurate with that message. The BoJ’s YCC widening also helped as yield increases in JGBs attracted large marginal buyers of US sovereign duration.

Commodities

Energy seems to be one of the few commodities holding up well.

WTI Crude saw a spike on Wednesday, briefly crossing $95/bbl on the news that the oil reserves in the US are dangerously low. Oil reserves have fallen to ~22 million barrels at Cushing, Oklahoma - the main delivery point for US futures.

There are two major ETFs to gain exposure to oil companies:

• XLE - Energy Select Sector SPDR Fund

• XOP - SPDR S&P Oil & Gas Exploration & Production ETF

The performance of these two against oil prices however, isn’t uniform. The chart below shows XLE in orange and XOP in purple. Clearly, XLE has been the better performer. It’s just something I was curious about so I thought I’d share.

Some of the charts in the recap section have been sponsored by Koyfin. We have a special discount of 15% for MacroVisor readers for any new sign-ups to Koyfin. To take advantage of this promo please sign up here - Koyfin MacroVisor Discount

Macro - World Trade Volume

The Netherlands Bureau for Economic Policy Analysis (CPB) released a report on World Trade Volumes that showed a significant dip in July. Global trade volumes have declined the most since the pandemic, falling -3.2% YoY and -0.6% MoM.

We’ve been seeing the data out of China and it’s not pretty. China’s export volumes to Europe have fallen over -20% this year while export volumes to the US hover around -15%. These are average numbers but, are surely significant.

I looked up the PMI data from S&P Global and while we look at this on a monthly basis, a detailed look in the context of Global Trade Volumes is useful. Clearly, what we see is that new orders have been drying up and they are closely correlated with trade.

If you look at the PMIs even at a country level, while prices are holding steady, new orders are not. This is particularly true for the developed countries, where the aggressive rate hiking cycle has definitely dampened demand.

With interest rates increasing we’ve also been seeing a decline in credit. Whether this stems from banks tightening their lending standards or from companies not demanding loans, the end result is the same. Trade finance is a major contributor to global trade volumes and the lack of financing means less business.

Earnings Season Q3, 2023 - Factors to consider

We’re two weeks away from the beginning of Q3, 2023 earnings season.

~90% of the S&P500 have entered the blackout period as of this weekend. The blackout period is significant because this is the time when companies cannot buyback their stock. But, this period is also known as the quiet period and it’s the time when companies cannot divulge any information surrounding their performance prior to their earnings release. Ideally, volatility should be low during this period but, given how the market dynamics have changed because of options, that may no longer be the case. Just something to keep in mind.

According to FactSet, the expected blended earnings growth rates for the upcoming Q3, 2023 results are:

• S&P500 = -0.39% (Q2 was -4.1%)

• Nasdaq 100 = +12.32% (Q2 was +16.23%)

There are a few things to consider this earnings season:

• The decline in inflation will mean companies with pricing power who increased prices will have to reverse the situation, i.e., adjust prices downwards. We’re likely to see revenues decline YoY for most companies not just because of a decline in pricing though, but also because demand has declined.

• While energy costs have increased, we may not readily see the impact this quarter for ex-energy companies. However, one thing to remember is that a spike in oil prices is not always passed on to the consumer. What we saw over the last couple of years was more the effect of the supply chain challenges.

• US Dollar strength however, may have a more immediate impact on revenues and earnings. Trough to peak, the US Dollar Index is up almost 7% in the third quarter.

• Wage costs will be interesting. We’ve seen wage costs increase in certain sectors and some tightness still remains in select sectors. This will be an important component to follow.

• The consumer is weaker. Over the first two quarters, we still had the residual impact of fiscal stimulus in the system with cost of living adjustments, SNAP benefits and stimulus checks. Much of the excess savings from the pandemic period are now gone. I’m sure you’ve seen plenty of charts to attest to that. But, as well there was a ballooning of credit. Unfortunately, we’re seeing the interest burden affect the consumer now and delinquencies are rising rather rapidly, reaching almost pre-pandemic levels.

• Many of the tech companies were quick to cut costs and adjust to the new normal. Whether the cost cutting will be sufficient to sustain profits in the face of lower demand remains to be seen.

The Week Ahead

US Earnings Calendar

US Economic Calendar in Eastern Time (Source: Trading Economics)

Closing Thoughts

The macroeconomic environment still remains tough. We’re seeing this reflected in the activity data (ISM & PMI) and a decline in inflation isn’t necessarily a positive for companies. Finally, we’re starting to see easing in the labor market. This will certainly have an impact.

I know it sounds like a lot of gloom and doom, yet again. But, this is the reality we’re facing. If companies have prepared well and can still navigate this environment fruitfully, then they deserve credit.

Most companies have discussed the tougher landscape but, there are still a few that remain very optimistic, and some that remain totally ignorant.

Remember: Past performance is no guarantee for future results.

Here’s wishing you safe investing.

Sincerely yours,

Ayesha Tariq, CFA

There’s always a story behind the numbers.

None of the above is Investment Advice. I may or may not have positions in any of the stocks or asset classes mentioned. I have no affiliation with any of the companies other than explicitly mentioned.