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Tuesday, March 22, 2022
Today’s newsletter is by Emily McCormick, a reporter for Yahoo Finance. Follow her on Twitter
When it comes to sparking a move higher in stocks, news doesn’t necessarily have to go from bad to good, or from good to great.
“Very bad” to “slightly less bad” can be enough.
And that reasoning offers one explanation for why stocks rallied into the end of last week, jumping by the most since November 2020 even in the face of an ongoing geopolitical crisis, red-hot inflation and specter of still-tighter monetary policy. In fact, last week was only the fifth time ever that the S&P 500 gained at least 1% for four straight days, LPL Financial’s Ryan Detrick pointed out.
“You don’t necessarily need good news for the stock market to do well,” Baird market strategist Michael Antonelli told Yahoo Finance. “You just need the news to get ‘less worse’ — which is nuanced, it’s all about rate of change.”
And indeed, the backdrop for equities has arguably improved to a notch above a recent nadir. Here are four developments that suggest this.
First, Russian President Vladimir Putin carried out what many considered would be the worst-case scenario in actually launching a full-scale military invasion of Ukraine on Feb. 24. In the days and weeks immediately following the attack, the U.S. and European nations responded with a host of sanctions on Russian individuals and entities. All of this was met, in turn, with a stock market sell-off that factored in significant disruptions to global financial markets — regardless of whether or not such disruptions would ultimately come to pass or be as dire and sweeping in scope as some feared.
Since then, peak fear has at least temporarily come down.
“Feb. 24, that’s when the news kind of was as bad as it gets between oil and the invasion,” Antonelli said.
Second, corporate earnings expectations for the first quarter are still showing a quarter-over-quarter decline — but the gap is narrowing.
As of the week ended March 18, Wall Street analysts expected S&P 500 earnings per share to come in at $51.91 in aggregate for the first quarter, according to FactSet. That suggests a drop in profits compared to fourth-quarter actual results, when S&P 500 earnings came in at $55.37 a share.
But as analysts at DataTrek pointed out in a note on Monday, while Wall Street is still projecting a decline in earnings power compared to the fourth-quarter, expectations have at least come off recent lows. During the week ended Feb. 25, earnings estimates fell to $51.64 per share for S&P 500 companies. So at $51.91, the latest first-quarter earnings estimate is up compared to three weeks ago and compared to a month ago, when earnings estimates were at $51.86.
Third, on the inflation front, recent data have pointed to early signs of peaking in the rate of price increases, at least based on some metrics.
Though consumer prices accelerated (again) in February, wholesale prices have started to stabilize. Last week, the producer price index (PPI) for last month showed wholesale prices rose 10.0% on an annual basis, matching January’s record high year-over-year rate in data going back to 2009. On a month-over-month basis, the PPI slowed to a 0.8% increase, falling more-than-expected from a 1.2% rise in January.
“The good news comes from seeing final demand services prices were unchanged in February for the first time in at least a year,” said Chris Rupkey, chief economist at FWDBONDS, referring to the PPI print. “Inflation isn’t under control by any means, but the tide may be turning where inflation broadly speaking doesn’t grow any worse.”
And finally, supply chain concerns among major corporations also appear to be easing from historical highs.
Mentions of “supply chain” on S&P 500 earnings conference calls — used as a proxy for actual supply chain issues — dipped slightly in the fourth quarter after hitting a record high of 362 in the third quarter. According to FactSet, executives at a total of 358 S&P 500 companies mentioned “supply chain” during their fourth-quarter 2021 earnings calls.
Other metrics have pointed to a similar phenomenom. The New York Federal Reserve’s Global Supply Chain Pressure Index, which tracks a basket of indicators used to gauge disruptions to the supply chain, dipped to 3.31 in February from 3.82 in January and a peak of 4.50 in December. The figures reflect the number of standard deviations the index has moved above its average value since 1997.
To be sure, the goal here isn’t to paint a Pollyannaish picture of the current state of the economy or geopolitical situation. Just because inflation isn’t rising at an accelerating rate doesn’t mean prices aren’t still rising — and it certainly doesn’t mean they’re falling. And as the New York Fed put it, “while global supply chain pressures are decreasing, pressure still remains high.” Plus, there’s still a significant amount of uncertainty over how Russia’s war in Ukraine will ultimately progress.
But at least for stocks, and for now, gains even in difficult situations can still come as investors price in what good news — or at least, what “incrementally less bad news” — they can glean.
“I think you’ve got to be asking yourself … if you’re a trader or investor, is the news getting ‘less worse?’” Baird’s Antonelli said. “And I think for now, it probably is.”
What to watch today
Economy
Earnings
Pre-market
Post-market
Politics
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The confirmation hearings for Supreme Court justice nominee Ketanji Brown Jackson are set to get underway in earnest for a second day as senators will now be able to ask Jackson questions beginning at 9:00 a.m. ET. Senators will have up to 50 minutes each.
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Global energy prices will be in focus as U.S. Energy Secretary Jennifer Granholm travels to Paris to chair the International Energy Agency Ministerial Meeting later this week. U.S. Special Presidential Envoy for Climate John Kerry is also scheduled to attend the meeting.
Top News
European shares edge higher on boost from banks, energy [Reuters]
Alibaba increases share buyback to $25 billion from $15 billion [Reuters]
Powell: Fed will ‘adjust policy as needed’ to lower inflation, avoid recession [Yahoo Finance]
Nike earnings beat estimates despite Ukraine war, supply chain issues [Yahoo Finance]
Yahoo Finance Highlights
Sell stocks, warns one of Wall Street’s biggest bears after fresh rally
CEO optimism dips amid ‘unprecedented times’
Who will be the first trillionaire? Study predicts Elon Musk in 2024.
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