Contributing to the stock market selloff today was more bad news on the inflation front. Nonfarm business (NFB) productivity dropped 7.5% (saar) during Q1. It wasn’t as bad on a y/y basis, falling just 0.6%. It’s a very volatile series on a q/q basis and even on a y/y basis.
The world’s second largest economy is falling into a recession. China’s authoritarian regime, which is run by the Chinese Communist Party (CCP), is imposing severe lockdowns to stop the latest Covid-19 outbreak. As a result, the economic outlook is quickly deteriorating:
The Investor Intelligence Bull/Bear Ratio (BBR) fell during the May 3 week to 0.79 from 1.04 the previous week. It’s been hovering around 1.00 for the past few weeks. In the past, such low readings turned out to signal good buying opportunities for long-term investors.
We are keeping an eye on the Citibank Economic Surprise Index (ESI), which is highly correlated with the 13-week change in the 10-year US Treasury bond yield. The ESI measures the degree to which economic data are either beating or missing expectations.
While investors have been lowering the forward P/E of the S&P 500 since the start of this year, industry analysts have been raising their estimates for S&P 500 revenues per share and earnings per share to record highs for both 2022 and 2023.
Spooked investors have driven valuation multiples down to the low end of our projected range and deposited the Nasdaq in a bear market and the S&P 500 back in correction territory.
More air came out of valuation multiples this past week. Here are the forward P/Es of the major indexes at the start of this year and on Friday:
April's national survey of manufacturing purchasing managers will be out on Monday. We expect that the M-PMI composite index is likely to remain around its March reading of 57.1
The US dollar is soaring, and so is the US trade deficit. How can this be? Record capital inflows must be more than offsetting the record trade deficit.
There is an inverse correlation between the forward P/E of the S&P 500 and both the 10-year US Treasury bond yield and the comparable TIPS yield.
While industry analysts are still raising their earnings estimates for this year and next year, investors continue to take the air out of valuation multiples.
The Bank of Japan (BOJ) is an outlier. While all the other major central banks are turning more hawkish, the BOJ remains extremely dovish. This is causing the yen to dive.
