September 16, 2022,
This is a week we are glad to have in the rearview. A stronger than expected inflation report started the stock market pullback on Tuesday, and today’s news from FedEx brought another leg down. FedEx warned that their earnings for the current quarter and rest of year will be well below expectations, blaming a stark decline in economic conditions. Part of the issue is surely company-specific, but the news still shook investors.
The S&P 500 lost about 6% over the week. We are still above the lows for the year (seen in mid-June) by about 5%. Valuations look attractive, but earnings estimates for a wide range of companies need to be lowered before we can take the current valuations seriously. Higher costs of goods, increased wages and hiring challenges, global tensions, energy crisis in Europe, and now a 15% corporate minimum tax (part of the “Inflation Reduction Act”) will all have an impact. We believe most of that is reflected in stock prices, but the uncertainty about how badly and for how long these factors will impact earnings is unnerving.
The good news? We see a few companies that are getting close to compelling price levels. We have also been active, where appropriate, buying individual high-quality corporate bonds. The rates on these bonds are higher than they’ve been in many years, and we do not need to take a long maturity risk to find strong yields. It’s a good time to put some cash to work in bonds, and probably getting close to opportunistic levels in several stocks as well.
Although Tuesday’s CPI (Consumer Price Index) report showed inflation is still a large problem, there are many indications that financial conditions are tightening. The housing market is a prime example. Mortgage rates just crossed 6% for the first time in 14 years, and mortgage applications are at their lowest point in two years. Many real estate analysts are calling this a ‘housing recession’ already. Rents tend to lag home prices by about 18 months, so they may climb a little longer, but the tide is clearly turning. As we see more evidence of inflation rolling over, we expect the market to react enthusiastically. We are in one of those odd periods where “bad news is good news”.