Kerr Financial Group
Kildare Asset Mgt.
Jeffrey J. Kerr, CFA
April 28, 2023 – DJIA = 33,826 – S&P 500 = 4,135 – Nasdaq = 12,142
Wall Street Asks If The Glass Is Half Full
To some the glass is half full and to others it’s half empty. This quarrel between optimism and pessimism arises throughout our world. These mindset differences are growing wider and deeper in many areas of our culture.
The financial markets have long been a battleground of opposing opinions. In fact, Wall Street has assigned each side a mascot – the bull and bear. And while the fight is never ending, the 2023 episode is exceptional.
This year is unique on countless levels with economics and finance having their share of distinctive issues. For example, the bulls and bears disagree about the impact and longevity of the Federal Reserve’s policy of raising interest rates. There is broad optimism that the Fed will stop raising interest rates soon and then pivot to reducing rates and loosening monetary conditions.
The pessimists in the financial community believe the Fed will continue raising rates and then will be patient before any shift. They point to multiple speeches by Fed leaders and Chairman Powell that emphasize the need to reduce inflation.
Another related and critical topic dividing the bulls and bears is the economy. The bulls, counting on the tailwinds from a Fed swinging to interest rate cuts, are predicting an economic rebound and growth starting in the second half of 2023. Additionally, the recent stock market declines, they believe, have priced in all bad news and it’s time to click the “buy” button.
The ursin view is much different. Inverted yield curves have historically led to recessions. The record level of the current inversion suggests that the recession will be deep and long. Layoff announcements have become a regular occurrence and their impact has not been fully felt.
We’re in the middle of the 1st quarter earnings reports and the numbers, so far, are troubling. 258 companies within the S&P 500 have released results. The summation of these reports shows revenue growth of 4.9% year-over-year. Earnings have fallen 2.6% for this same period. Looking at the industry sectors, technology reported a 1.2% decline in revenues with a 12.8% drop in profits. The same data for the Nasdaq 100 index (46 companies reported) is worse. Sales have increased 4.4% while net income is down 6.9%.
The banking crisis is another glass half full-empty development. Wall Street bulls are confident that the failures of Silicon Valley Bank and Signature Bank are isolated events and that the Fed and other regulators have addressed the problems. With the system stabilized, banks will start financing housing and businesses.
The bears contend that the crisis is starting and that it will continue to grow. The increase in interest rates during the past 12 months has impaired the loans that banks have on their books. The value of a low interest rate mortgage that was done years ago has plunged given the current level of rates.
This is a large problem for many lenders and their balance sheets have been devastated. Of course, the Fed has initiated a new program that basically allows a bank to pretend that an underwater asset is worth its original value. They are lending to all banks based on fabricated numbers. This might work in the short term, but it doesn’t address the problem of the loss of value.
Opposing viewpoints drive the markets. A buyer sees value while a seller sees an opportunity for liquidity. The willingness of each party to transact at an agreed price is what makes markets. The capital markets of 2023 are facing widely differing views. Economic developments as well as geo-political and international problems will drive the markets. Ultimately the views of the bulls and bears will determine the path forward.