This earnings season has not been free of concern, and profit margins are clearly weakening from last year’s highs. Our earnings waterfall template highlights several themes coming out of third quarter results.

A new study looking at the relationship between inflation and profit margins is introduced. The goal is to understand how the latest margin peak was reached in mid-2021 and what impact inflation might have on margin forecasts underlying next year’s earnings estimates. Full report will be sent mid-month.

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When Jerome Powell took the reins of the Federal Reserve in early 2018, many commentators cheered the fact that he does not possess a Ph.D. in Economics. It will be many, many years before historians are able to conclude whether that’s a good or bad thing.

Yesterday’s action, though, left us wondering whether Powell might stealthily be in the process of earning a different designation—that of Chartered Market Technician (CMT). 

Read the latest MTI update...

Read the latest MTI update...

The 2022 bear market has been driven by collapsing valuation multiples, particularly for expensive growth stocks and unprofitable companies. Coming into the year, U.S. stocks stood as one of the most egregiously valued equity markets around the world, motivating investors to look elsewhere for more reasonably priced alternatives. Fortunately, international stock markets offered much better valuations that could serve as havens from the coming U.S. valuation collapse. Unfortunately, the strategy of seeking refuge in moderately priced foreign markets was foiled by an unusually strong U.S. dollar, leading us to take a closer look at how moves in the USD affect investment outcomes for domestic investors.

Our studies of economic and stock market history are meant to provide perspective, not an investment roadmap. But occasionally a current trend will resemble the past so closely it’s eerie.

Take the current inflation cycle. If (as we believe) June’s CPI inflation rate of 9.1% represents the peak for this business cycle, then many of its characteristics have lined up almost perfectly with the “average” of past inflationary episodes.

Read this week's Major Trend. 

Lower than expected CPI figures give the Fed an opportunity to ease the pace of tightening. Markets, probably bracing for yet another higher than expected reading, shoot higher. Our Scorecard sees inflation’s downward trajectory continuing.

Read this week's Major Trend update. 

Thanks to the 2009-2021 experience, an entire generation of investors can’t distinguish between a stock market that’s down in price and one that’s actually “cheap.” The current bear market seems on course to make that distinction relevant again.

There might be “too much money chasing too few goods,” but some monetary measures imply there’s “no longer enough money” to finance production of those goods and still support a stock market that’s far from cheap.

A rotation from Growth to Value resumed in grand fashion in October. Qualitatively, new leadership sounds like a good thing. Statistically, bulls ought to hope that the tape gets back into gear.

The main yield curve drivers—fiscal and monetary policies—might be suggesting a steepening move is coming soon, while bank stock performance may also be hinting at a turn in the curve. However, a durable selloff in the U.S. dollar would be needed to support a steeper yield curve, so the tightening pain could last a while longer.

With an 8% S&P 500 advance in October, our valuation measures bounced pretty hard off the contemporary lows. The estimate for downside to the median,1957-to-date, widened from -21% to -27%; while the “New Era” estimate (1995-to-date) worsened to -12% from -5% at the beginning of October. 

The U.S. Dollar Index (DXY) has gained 16.2% YTD, its best performance in almost 40 years. However, a strong dollar is bad for those with international investments, as returns are slashed when translated back into dollars. 

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“Money illusion” continues to complicate analysis of the economy and financial markets. It might be a time when age and experience will actually prove helpful: Only investors who are 65 or older have experienced gaps between “nominal” and “real” data as wide as today’s.

Read this week's Major Trend.