After a big bounce yesterday, the conventional wisdom now seems to be that the stock market has found a bottom. The S&P 500 closed on Tuesday around 8.25% above its lows, which certainly supports that idea. However, investors should be wary of a “bounce” that is based on earnings, as many are saying this is. Those earnings aren’t objectively as good as the subjective response to them suggests, and in the stock market, while feelings may dominate in the short-term, numbers always matter more in the long-term.
What We Can Learn From Q2 Reports
Yesterday marked exactly one week since PepsiCo (PEP) kicked off earnings season as the first recognizable name to report results for the quarter that ended in June. It is probably too early to make sweeping statements about the second quarter as a whole, but so far, there seems to be a discernible pattern to Q2 for major corporations: “not as bad as they could have been.”
I get it. After six months of fear-driven selling, “not as bad as they could have been” feels like good news. Still, when you stop and think about it, it means the results are still bad. The bounce-back probably indicates that stocks, when they were at their lows around a month ago, had fallen too far, too fast to that point. Some sort of relief rally was inevitable, but the way the market is reacting to some results just doesn’t look sustainable.
The reaction to the aforementioned PEP earnings set the tone in many ways. Yes, Pepsi did beat expectations on both the top and bottom lines, and even more encouragingly, offered better than expected guidance for the rest of the year. They achieved better than forecast results by raising prices and reducing the size of their products, thus demonstrating the effects of both inflation and the currently trendy concept of “shrinkflation.” The degree of brand loyalty that the firm enjoys enables them to do that without a negative impact on sales volumes, which is good news for Pepsi.
Fast forward a week, and results from JB Hunt Transport (JBHT) told a similar tale. They too faced higher costs, in their case even more so given what has happened to fuel prices but, were able to largely pass those costs on to their customers.
However, not every company has the ability to do that and, even for those that do, it is a strategy with an inherently limited lifespan. Consumers and businesses remained flush with cash in Q2, as you might expect given that the previous ten years had seen expansive fiscal and monetary policy. However, those days are ending, and at some point, the Fed’s tightening will have a real impact on spending power, both corporate and personal. That is the worry right now. The market lost a lot of ground on the fear that tough times were ahead and is now bouncing back because they don’t seem to have arrived … yet.
What We Can Learn From The Housing Market
Simple logic, however, tells us that they will. Mortgage applications are declining rapidly, meaning that house prices will probably follow, and a lot of companies are announcing plans to cut back on their hiring or spending. That hasn’t had an impact on the backward-looking data yet and the labor market is still strong. Once again though, that is because the impact of those things have yet to be felt. When it is, any sense of job insecurity, when combined with falling house prices, continued inflation, and the negative wealth effect of lower stock prices, will cause consumers, and businesses, to rethink paying more for less.
I don’t want to be the bearer of bad news, but this looks like a typical relief rally in that it is based on emotion, not logic. If that is so, then enjoy it while you can, because in a month or two, when the cold, hard facts catch up with what we know is happening and is going to happen, another move down in stocks is likely.