Weekly Update 11/10/2023: Earnings Season Winding Down
- Celanese reports challenging quarter
- Disney reports stellar year-end results and names new CFO
- ADP boosts dividend 12%
- Fed's Powell speaks at IMF conference
Economic Data
The last few weeks saw a lot of important data released by various government agencies culminating in the monthly employment report last Friday. This week the calendar was lighter. Of note was the weekly initial unemployment claims reading from the Labor Department. In the week ending November 4, the number of claims fell to 217,000 while the four-week moving average rose to 212,250. The number of continuing claims, which tracks people who continue to receive unemployment benefits, rose for a seventh consecutive week to 1.83 million in the week ended October 28. This suggest that out-of-work people are having a harder time finding a job. The unemployment rate of 3.9% is the highest in nearly two years and has jumped from multi-decade lows of 3.4% posted earlier this year. Clearly the momentum seen post-pandemic last year has faded as employers are starting to scale back hiring plans. Employers have held on to workers because of the difficulty and expense of trying to find new hires that marked 2021 and 2022. We will keep you posted about labor trends with one more monthly payroll and employment report due on December 8 which is five days before the Federal Open Market Committee’s last scheduled meeting of the year.
IMF conference and the Sahm Rule
Federal Reserve Chairman Jerome Powell spoke at the International Monetary Fund’s annual research conference yesterday. He said the Fed will continue to move carefully but “will not hesitate” to tighten policy with more interest rate hikes if needed. “We will continue to move carefully, however, allowing us to address both the risk of being misled by a few good months of data, and the risk of overtightening,” he said. He added that “we are not confident that we have achieved such a stance [of returning inflation to their 2% target].” Some outlets may have noted the tenor of Powell’s speech was more hawkish than other previous speeches, but the message has not really changed since the start of the year. Powell has been clear in stating that he and his colleagues will be data dependent and has not wavered from the goal of reducing inflation back to target, not accepting that 3% or 4% was “good enough.” While futures markets convinced themselves that a rate cut was nearly certain by the middle of this year, the fact is it pays to listen and not jump to conclusions. "Not a single person on the committee wrote down a rate cut this year, nor do I think it is at all likely to be appropriate if you think about it.” He said that back in June which is about when the markets finally stopped trying to read between the lines and actually read the lines themselves.
That said, the data is pointing towards a slowdown which would eliminate the need for any further tightening. In fact, the latest employment figures have triggered what is known as the Sahm Rule. The Sahm Rule indicator, named for economist Claudia Sahm, signals the start of a recession when the three-month moving average of the unemployment rate rises by half a percent above the 12-month low of the unemployment rate. Since 1970, each time the unemployment rate has climbed quickly enough to trigger the Sahm rule, an economic downturn had either already begun or followed shortly thereafter. The 12-month low of the unemployment rate was reached in April at 3.4%. The average of August, September and October is 3.73%, so we are not quite there to trigger the indicator, but much closer than we have been in the last three years. As discussed above, the number of people continuing to be unemployed has risen for nearly two months on a weekly basis. Real disposable income has fallen for three consecutive months. Commodities markets are important forward indicators because they are the raw goods that comprise what eventually becomes finished goods at some point in the future. The Mideast continues to be a politically charged hotspot, yet the globe’s crude oil benchmark is down nearly 8% over the past month. Copper is often affectionately called Dr. Copper because of its Ph.D. in economics due to its ability to forecast trends. It is down over the past 3- and 6-month periods.
The hope is that any recession, should it occur, would be short in duration or shallow in depth or both. At this point, it appears that inflation, while maybe not dead, is under control enough that the markets can and probably should turn its attention to an economy which is shifting gears lower. Investor worry in the coming weeks is likely to shift to whether the Fed is proactive enough to begin loosening the restrictive environment that was necessary to slow down the economy but would be inappropriate during a slowdown. Stay tuned!
Company Events
With over 410 of the 500 companies in the S&P 500 firms having reported through Tuesday, we can draw some conclusions about the third quarter. Year-over-year, earnings per share are tracking up about 3% which is a notable improvement from the 2% decline expected back on October 1. However, we are noticing that last month, many analysts lowered their earnings per share estimates for the fourth quarter more than usual. According to John Butters, a senior earnings analyst at FactSet which tracks corporate results, “In a typical quarter, analysts usually reduce estimates during the first month of a quarter. During the past 20 years (80 quarters), the average decline in the bottom-up EPS estimate during the first month of a quarter has been 1.7%.” For this past October, that decline has been more than twice as bad at 3.9%. So, we conclude that analysts are beginning to price in the chance of slower economic growth affecting earnings in the next three to six months.
Nonetheless, after three consecutive quarters of year-over-year declines, investors are pleased to see Q3 2023 actually report a positive comparison. And the number of positive surprises (where actual reported earnings are above the expectation recorded at the start of the quarter) is running at 82% which is above the long-term average of about 68%. The expectation for fourth quarter year-over-year S&P growth is 3.6%, and it is 7.2% for the first quarter of 2024. Moreover, companies have long stuck to the earnings game of “under promise and over deliver” meaning management sets expectations low so they can exceed them and pat themselves on the back. Problems occur when actual earnings miss even lowered expectations, but we do not see that happening on a market-wide basis in the near future.
For clients of the firm, SGK provides additional insights on our core equity holdings
Please remember that past performance is no guarantee of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Steigerwald, Gordon & Koch, Inc. [“SGK”]), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from SGK. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. SGK is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the SGK’s current written disclosure Brochure discussing our advisory services and fees is available for review upon request or at www.sgkwealthadvisors.com. Please Note: SGK does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to SGK’s web site or blog or incorporated herein, and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please Remember: If you are a SGK client, please contact SGK, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services. Unless, and until, you notify us, in writing, to the contrary, we shall continue to provide services as we do currently. Please Also Remember to advise us if you have not been receiving account statements (at least quarterly) from the account custodian.