The Lookout | Week of April 25, 2022
This week we’re featuring insights from Simon Lack and his team at SL Advisors, and Dan Rudnitsky of SMH Advisors in this edition of The Lookout.
Major Market Events:
Tuesday, April 26: US Core Durable Goods, CB Consumer Confidence
Wednesday, April 27: ECB President Lagarde Speeches, Bank of Japan Monetary Policy Statement
Thursday, April 28: US GDP and US Initial Jobless Claims
Friday, April 29: EU CPI Report
Simon Lack, SL Advisors, and Portfolio Manager of an energy infrastructure fund
- The Fed wants tighter financial conditions, and this needs to manifest itself via higher long-term yields since sectors like housing and capital spending are more sensitive to the ten-year yield than the Fed Funds rate. The Fed also needs a weaker stock market because households that feel poorer will spend less, cooling things down. It is truly an unpleasant prospect.
- Ten-year yields are approaching 3% as compared with 5% annual inflation. Former NY Fed President Bill Dudley notes that policy remains very loose. But yields are edging up, helped by Fed officials warning of successive 0.50% rate hikes, as Powell did last week.
- Earnings forecasts are being revised higher, reflecting little evidence of any influence from the Fed. Analysts still expect growth next year of 10%, but a 3.4% ten-year yield in 2023 would be enough to keep the ERP (Equity Risk Premium) at 2.5. By this measure, stocks are as expensive as they’ve been in the past decade. Tighter financial conditions include a weaker stock market, according to Bill Dudley. If the stock market repriced to its average ERP of 3.3 over the past ten years, that would imply the S&P 500 around 15%, lower.
Daniel Rudnitsky, SMH Advisors, and Senior Portfolio Manager of an income strategy
- Investors are preparing for the busiest week of earnings season, with 160 companies in the S&P 500 set to report quarterly results.
- We’re keeping an eye on the upcoming economic calendar, which includes updates on new home sales, durable goods orders, pending home sales, GDP, and trade balance – however, the bigger focus is likely to be on Federal Reserve expectations.
Thank you for reading The Lookout. Come back next Monday for more insights on what investors can expect in the markets.