Transcript:
Tom Vaughan:
I do always like to start off the week with a summary of what I’ve seen happen to the stock market this week. And so right now, as we speak, here on Friday, the markets still open. But we were hitting low points for the year so far, kind of broke through that 20% down barrier from the high point that happened back in January, to the low point that has happening right now. And really, what we’re seeing all together is that every time there’s kind of a nice run upward, so Friday, we had a great up day, Wednesday, sorry, Tuesday of this week, we had a really good up day. And then Wednesday, we had a big sell off, right, so things just kind of really fell off. And the catalyst for Wednesday was very interesting. So target, which is a really well respected company that has been doing very well throughout the pandemic reported their earnings, and they missed their earnings by quite a bit. And they talked about, really the fact that they have two things happening number one, is that the consumer was shifting from kind of the non food type items. tube’s more money on basics. And so they have a excess inventory in some of those other areas, because Target sells all kinds of things besides just food. And then obviously, the other thing that they talked about was the increased cost that were coming from transportation, specifically from gas price increases.
So we’re kind of seeing the effect here of what’s going on from the Ukraine scenario, where we saw oil prices come up, and obviously, gas, there’s some delay and lag in there. But this was followed by Tuesday’s report from Walmart, who basically said the same things are so struggling with the same areas. And what happened was that these companies are their low price companies in terms of their products. And so they don’t really have the capability to increase their prices as easily theoretically, as some of the other companies because at the same time, Tuesday, and Wednesday of this week, Home Depot and Lowe’s both reported, and in both cases, their earnings were okay. And Home Depot even talked about the ability to raise their overall price without having any real demand drop off. So they saw very strong demand. So it depends on which consumer you have as to what how that’s going to affect but we saw the market come down pretty dramatically on Wednesday with that report from from the target. And target itself took a 25% hit, which is really incredible to me, and then it actually fell another 5% The next day, so pretty big destruction of value in that company.
I do think at some point in time, this is where the values are going to be a company I really like Target altogether, I think that they’re very well run, they’re now selling at 13 times earnings. And one of the I guess the silver lining to what’s happening here is that there’s going to be some opportunities to pick up really high quality companies that are creating great earnings at some decently low prices. So unfortunately, right now, the problem with these earning problems with Target and Walmart is sort of like the canary in the coal mine as far as the market was concerned. And so if Target and Walton Walmart can’t increase price to keep up with their increased costs, what happens when it’s Apple or Microsoft or Nvidia or any of these other companies that are out there that can’t do that, then you’re going to end up with lower profits than expected because right now, the expectation for profits is, you know, roughly nine 10% per quarter, four and nine 10% for the whole year for 2023. On the analyst expectations, another 10% growth expectations on 2023. So the analysts are looking at this and still see earnings potential growth, a little slower than we’ve had, as we’ve come out of this pandemic, with all this money behind us, but nonetheless, still expecting growth. Unfortunately, when you look back at big market downturns or recessionary time periods, what the analysts are looking at isn’t a great predictor of what’s going to be happening. Sometimes they get a little pessimistic, like they were during the pandemic, and maybe they’re a little optimistic now, you know, during this particular period of time. And so really what you want to be able to do now, all right, first of all, assuming you’re still hanging in there, you’ve got your portfolio, hopefully well allocated, you’ve got the right amount of bond versus stocks so that you know, your downturn, the markets down 20%, maybe you’re down seven or you know, eight, depending on you know, your allocation to stock and bond. And is to kind of look at what’s going to happen to the economy.
The stock market is one of the predictors that we look at when we look at economic downturns. But there’s a kind of a funny saying that the stock market has predicted nine of the last five recessions. So it’s not a perfect predictor of, you’re looking at for recessions and, and really, recessions are the big issue right now, that’s what we’re looking at, are we going to have one or not? The consensus seems to be we’re going to have one, but that doesn’t mean we will. Because the economy is very, very hot right now, the Federal Reserve has talked about being able to kind of push the brake pedal down, and the economy still has enough room to be able to slow down the economy, get, you know, inflation back in line without pushing the economy all the way into recession. A lot of people don’t believe that. And that’s why the market is kind of falling right here, too. Having said that, what is a great predictor of a future recession. And because you kind of want to combine those together, in my opinion, right? Now you want to look at what the market’s doing. So it’s telling us things are going to be bad here in the future for the economy, at least in its opinion. But it’s not always right. And then you want to look at some predictors for what is going to be happening with the economy in terms of recession. So I’ve done a lot of work on this, you look at Treasury yield spreads between the two and the 10. Year, you look at all of these different areas. And the one predictor that I have found that seems to be the most accurate, is the leading economic indicator, which I will put up here. And so this is put out by the Conference Board. It is it seems like the majority of the really good indicators that have been successful historically, at predicting in advance a recession are baskets of indicators, not just one, like the Treasury yield or what have you. But it’s, in this case, 10 different indicators. And so this is going back to 1988. If you look closely here, you can see that we’ve peaked on the blue line, which is the indicator, you know, average of nine months in advance historically. But you can see here before the 90, it was 18 months before the 2000. recession was 11 months before the 2008, it was 21 months, it says zero there before the 2020. Because the 2020 wasn’t an economic event, until that we closed everything down. So a little different.
But nonetheless, if you look at it now, still going up, however, we did see the indicator go down in January, but it popped right back up, and we hit an all time high in March. Okay, then it came down in April that was just announced yesterday. And so, one month moves aren’t enough. If you look closely at this line, you can see lots of little wiggles in there, where the economy kept going, even though the indicator came down or flattened out a little bit. My research going back to 1960s, you need at least a 1% drop from the all time high, which was established in March. Before it is, I think, an accurate indicator that we’re going to have recession. So we did drop point 3% in April. So we got another point 7% of drop to go before, in my opinion, this is signaling a fairly strong signal that we could have a recession. And that’s when in my research, you want to be looking at staying in the market as much as possible only because things can turn around so quickly. And things can turn around very quick. And unfortunately, that creates a problem for getting back in. If you get out right now. And things turn around, you know, you could get back in at a higher point.
And so you really want that bigger downturn that you’re getting out of. And those generally are oriented around a recession happening as the stock market’s falling, right. And so what we’re looking at here is the leading indicators, they’ve flattened rally for the year, all together, all that means is slower growth. So the Conference Board, which puts out this indicators is now projecting 2.3%, gross domestic product growth for the year. And just that’s what they consider kind of a slow, normal, moderate growth. But we want to watch this on an ongoing basis and see what happens. Because that combination of the 200 day moving average coming down on the S&P 500, and at least a 1%, fall off the high here on the leading economic indicators, historically has been a point in time where you probably want to get defensive, or at least you know, batten down the hatches and kind of deal with, you know, what’s going to be coming our way as far as that goes. So that’s what’s happening right now. And we’re still trying to figure out where things are going to go in that regards. We’re looking for what we call capitulation point where you know, if we are going to have a bottom, you generally have some kind of giving up, you know, where there’s a big downturn that pierces really low, you get that big stretch, the VIX, the via, you know, the fear index would be up really high those type of things. We are seeing a pretty good run up in the VIX today, but nothing substantial. It’s just below 33 right now on that number so those are the things that we’re watching for right now. And that’s what’s going on as far as that goes.
But hang in there, I do think there’ll be some opportunities. If things get worse, I do think we should get defensive. But in the meantime, just keep focusing on kind of the positive sides, because we’re hanging in there, because things could turn around. I mean, there are a lot of things that can happen on the negative, that are kind of surprises. Target’s earnings report on Wednesday, was a negative surprise. And that’s what caused the market to go down. But again, there are a lot of things that can happen on the positive side, one of the things I’ve been reading the most about is what’s happening in China. And I think there’s a potential there for them to surprise us that even though they’re doing these lock downs, that they’re still able to keep production up fairly adequately, we’ll see how that plays out. But they could change their mind tomorrow, and decide to do a different policy for how they’re doing their lock downs that might be more conducive. If that happened, the market respond quite positively. So there are lots of different pieces out there where we can start to see some increases.
However, I do, I wouldn’t be surprised to see the market just recover tomorrow. I think this kind of you know, deterioration is kind of a psychological damage that happens to market that it’s going to take some time for it to come back around. And I’d sure like to see the Federal Reserve’s start to get more accommodative, at least with their comments. I don’t really see that happening until September, personally, because I bet a June meeting a July meeting, maybe they start to soften their language just because the market is down. I think they’re kind of happy to have the market down. Because there’s two things that drive consumer spending, the stock market going up and house prices going up. And we’ve seen stock market come down. And we’ve seen, house prices are still holding up but we’re seeing some of the precursors for house prices possibly coming down. New home sales are down three months in a row. Applications for new home building are down. That’s part of this leading economic index. In fact, that’s one of the main drivers for Wyatt came down in April. And so those things are things that the Federal Reserve’s really I think probably looking for, because the consumer is continuing to spend. And that’s driving inflation. So anyway, that’s what I see happening now, for this week. I look forward to talking to you again next week. Thank you