The following is Steven’s research, the subject of his interview on Ausbiz News this week. You can find his previous videos at Steven Everett | ausbiz, or read on.
Have stocks bottomed in the near-term?
The fall of the Alamo
Of the top 100 companies in the US, we could find only 6 that are trading at a premium to their 5-year average P/E multiple. Except for Boeing, none were a surprise. Oil, healthcare, defence and communications were the sectors that featured, and of course Apple was there as well.
Thesan has had a theory for some time now that Apple at $150 was the Alamo. A break of that level would signal the final capitulation of those with faith, hugging their Apple shares and whispering to themselves “it will all be ok”.
Interestingly, on the 18th of May before the market open, a forward P/E comparison of the US market by capitalization revealed that the premium between the S&P 400 Mid-Cap to the S&P 600 Small-Cap, on a forward P/E was only 3.28%– while the next step up to the S&P 500 Large-Cap would cost you an extra 37.3% on the forward P/E. On a relative basis, this gap was closed on the 18th. (Chart below)
Turning to home, our premium appears to be in the Mid-Cap space, likely because of the weighting to materials and industrials– the stocks you want to own in a recession
We don’t think you could be heckled for drawing a conclusion from the above that a rather large portion of the market is pricing in a recession. Sometime in the next 12-24 months.
What if the Fed achieves a soft landing?
It’s not an easy task, but it has been done before. Most Fed tightening cycles do end in a recession, but it’s the depth and duration that may be the difference between catastrophic impact to corporate earnings or simply a quarter or two of recalibration.
Walmart and Target’s recent earnings provided some interesting insights. In terms of Walmart, they discussed how they had “aggressively purchased” stock to avoid potential empty shelves and that demand for those goods weren’t as high as they had been in the previous quarter. Sales volumes remained robust, although they noticed consumers had been substituting brand names for cheaper “home” brands in some categories. Target reported a similar inventory build-up in their electrical goods, which we suspect sat idle given consumers had already purchased such goods with the stimulus money provided in 2021.
The market looked upon those reports as a signal that US consumer demand was weakening, despite the Fed only just beginning to raise interest rates to combat inflation. Thesan however saw something different, it said to us that the US consumer was being smarter with their money (indicating some balance in money supply) and that supply chain inflationary pressure could subside towards the end of the year now that large chains aren’t panic buying stock. It’s too early to tell but the signs are there…
If supply chains do normalize, particularly once China emerges from lockdown, it could make the Fed’s job substantially easier to manage an orderly return to 2% inflation, without the need to depart from the 0.50%, 0.50%, 0.50% plan that has already been signaled for rate increases.
Value Shoots Emerging
Whether or not a recession does materialize, a period of consolidation seems necessary based on how heavily the market is discounting expected future earnings. Despite entering a market environment of higher nominal rates, when companies like Ford and GM start trading at forward P/E multiples in the low 3’s (ex-cash) and roughly 300% lower than their 5-Yr average multiple, it’s hard not to see value.
The same can be witnessed at home. Consumer discretionary stocks have been shunned, notwithstanding some like Super Retail Group reporting pretty solid earnings and trade at a single digit P/E with attractive yield.