Peak (fill in the blank) Peak (fill in the blank)\images\insights\article\crossword-puzzle-small.jpg December 7 2022 February 25 2022

Peak (fill in the blank)

Is the market putting in a bottom on peak everything?

Published February 25 2022

There are signs markets may be reaching peak “hawkish” behavior. Last week, 6-7 hikes for 2022 were quickly priced in after the CPI release. But with base effects ready to cause inflation to slow, and with the 10-year Treasury inflation breakeven well off November’s multiyear high, it appears some investors think this could be overdone. Term premiums on the short end of the bond market now indicate 5-6 quarter-point hikes this year. While this week’s Ukraine crisis (and its impact on energy prices, more below) likely takes a half-point increase off the table, next month should see Fed liftoff. So, maybe we’ve reached peak Fed policy fear? A prolonged flattening in the yield curve may be at an inflection point, with the 2-year/10-year Treasury gap widening in recent days. Peak yield curve worry? ETF flows into the S&P 500, Russell 2000 and Nasdaq 100 are approaching the first percentile. Peak bearish sentiment? Stocks already hit peak margin growth. But peak margin? Not yet. Looking back seven decades, Empirical Research says margins can continue to climb in the face of rising cost pressures as top-line growth subsumes everything else. It appears nominal GDP growth, while moderating, should remain well above trend (more below). So, peak almost everything.

Not energy. Year-to-date, oil prices have averaged $86/barrel—the highest since 2014—and blew through that level on the Ukraine crisis, with both Brent and West Texas Intermediate briefly topping $100 at the onset of yesterday’s Russian invasion. While European gas prices are about half their December peak, they’re still up over 4 times their year-ago level and are climbing again, up 8% in the 12 days before the invasion took them even higher. Replacing Russian oil is not the problem—over the past dozen years, U.S. shale oil production added output equivalent to Saudi Arabian exports, making the U.S. become a net exporter. It’s the loss of natural gas and some 2.5 million barrels of refined product (gasoline/gasoil, diesel, heating oil, jet) that Russia exports daily that’s the issue. That’s not something global markets can quickly replace. Germany alone imports 65% of its natural gas from Russia. Energy is the only S&P sector with a positive return year-to-date, and the rise of a new Cold War over the past few days likely will add to that performance. Energy may be overbought but its broad momentum suggests further outperformance over the next three months.

Take a breath. Despite volatility that has indexes well off record highs (76% of Nasdaq, 51% of S&P and 35% of ACWI are in bear markets), forward revenues, earnings and margins hit record-highs last week. Amid anecdotes of input cost pressures and weak management guidance, analysts’ 2022 forecasts keep rising. Strip out the five airlines and Amazon and 57% of S&P companies and 7 of 11 sectors are experiencing upward revisions. The market’s year-to-date decline has not been due to earnings but to an 11% P/E multiple contraction to 19x. The U.S. and global economies entered the Ukraine crisis with strong momentum (more below). Evercore ISI’s proprietary surveys for trucking, homebuilders, limo companies, airlines and hiring are in improving trends, Q4 nominal GDP surged at almost a 15% annual rate as did January’s broad gauge of money supply, and omicron cases have plunged 90% the past five weeks. Overseas, German unemployment was at a record low and its PMIs were accelerating this month. The crisis may hurt, but because Russia is a marginal global player outside of commodities, BCA Research still expects well-above-trend growth this year for the U.S., euro area and global economies. Geopolitical crises have tended to present buying opportunities, with sell-offs lasting three weeks and loss recovery another three weeks before the market returned to prevailing worries. Wolfe Research thinks the market’s underling concerns remain an unwinding of the Covid/Modern Monetary Theory fiscal bonanza that was unwinding before the conflict. If so, investors should expect more episodes similar to Thursday’s wild swings (the Nasdaq 100 had a 7.1% intraday move). Peak volatility? I don’t know …. 2022 looks like it’s going to be a l-o-o-n-n-g year.


  • The economy is fine A bigger than expected rebound in January put real consumer spending on track to advance 3.6% in Q1. Durable goods orders jumped 1.6%, nearly three times consensus, with an increase in core orders reflecting accelerating capital expenditures—TrendMacro’s measure puts capex at a record high. Also, continuing jobless claims fell more than consensus to their lowest level since 1970.
  • Services perking up Markit’s initial manufacturing and services PMIs for February rose, largely reflecting fading virus effects, with production, new orders and employment all rising. Surveys suggest services will remain buoyant, as travel & leisure are getting big boosts as omicron cases plummet.
  • Peak volatility? In addition to the Nasdaq’s move (see above), the S&P had a massive 426 basis-point reversal Thursday, a potential sign that markets could be bottoming. The VIX reversal also was huge, with a move that historically is in line with further gains one and three months later.


  • Housing off to a slow start Sales of new single-family homes fell 4.5% in January, ending a string of monthly increases. Pending home sales also tumbled a worse-than-expected 5.7%. Rising mortgage rates (the 30-year average has broken above 4%), soaring prices (the Case-Shiller gauge shot up 19% year-over-year (y/y) in December and the FHFA index was far behind at 17.7% y/y) and tight inventories were the key drags.
  • We have seen the whites of inflation’s eyes January’s PCE report reflected continued price pressures, with the core rate rising at a 5.2% annualized pace, up three-tenths of a point from December. Two-thirds of the core CPI basket has experienced 4% annualized inflation since last July (versus only 19% of the basket in 2019), and 16% of prices rose at a double-digit pace (versus 2% in 2019). This puts inflation’s breadth at levels last seen in the 1980s, with the center fifth of the core inflation basket increasing at a 5-6% annualized pace—compared to a 2.5-3.5% pace in normal or tight labor markets.
  • Americans aren’t very happy (who is mid-winter?) The Conference Board confidence gauge fell again as consumers continue to worry about elevated prices—the share planning to purchase homes, autos and home appliances or take vacations in the next six months all declined. Final Michigan sentiment for February inched higher but stayed at decade-low levels amid inflation and economic growth worries.

What else

Far from peak robot Their numbers and usage keep multiplying. To wit, White Castle has ordered 100 “flippy 2” robotic frying cells from Miso Robotic. And a growing number of companies are using chat bots and artificial intelligence-led video interviews to assess job candidates before a human recruiter even meets them. 

Precious farmland Did you know that Bill Gates is the largest private farmland owner in the U.S. with 242,000 acres across 18 states? … Ukraine is considered the “breadbasket of Europe” because of its rare fertile “black earth” soil that theoretically could feed more than 600 million people globally, helping to reduce food scarcity.

I don’t think this is what Einstein meant when he said time is relative Bank of America shares that if you compare Earth’s history to a calendar year, then humans have only existed for 37 minutes … but have used a third of the planet’s entire natural resources in just the last 0.2 seconds.

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Tags Equity . Markets/Economy .

Views are as of the date above and are subject to change based on market conditions and other factors. These views should not be construed as a recommendation for any specific security or sector.

Bond prices are sensitive to changes in interest rates, and a rise in interest rates can cause a decline in their prices.

Gross Domestic Product (GDP) is a broad measure of the economy that measures the retail value of goods and services produced in a country.

Consumer Price Index (CPI): A measure of inflation at the retail level.

The Conference Board's Consumer Confidence Index measures how optimistic or pessimistic consumers are about the economy.

The MSCI All Country World Index captures large- and mid-cap representation across 23 developed markets countries and 23 emerging markets countries. The index is unmanaged and covers approximately 85% of the global investable equity opportunity set.

Modern Monetary Theory (MMT): A macroeconomic theory postulating that sovereign currency-issuing governments (such as the U.S.) can finance any budget deficit by simply printing more money. Advocates suggest through higher interest rates and taxes, the government can effectively remove excess liquidity to cool the economy and prevent inflation.

Nasdaq-100 Index: Capitalization-weighted and includes 100 of the largest non-financial companies, domestic and foreign, in the Nasdaq National Market. In addition to meeting the qualification standards for inclusion in the Nasdaq National Market, these issues have strong earnings and assets. Indexes are unmanaged and investments cannot be made in an index.

Nasdaq Composite Index: An unmanaged index that measures all Nasdaq domestic and non-U.S.-based common stocks listed on the Nasdaq Stock Market. Indexes are unmanaged and investments cannot be made in an index.

Personal Consumption Expenditures Price Index (PCE): A measure of inflation at the consumer level.

Price-earnings multiples (P/E) reflect the ratio of stock prices to per-share common earnings. The lower the number, the lower the price of stocks relative to earnings.

Russell 2000® Index: Measures the performance of the 2,000 smallest companies in the Russell 3000 Index, which represents approximately 8% of the total market capitalization of the Russell 3000 Index. Investments cannot be made directly in an index.

S&P 500 Index: An unmanaged capitalization-weighted index of 500 stocks designated to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. Indexes are unmanaged and investments cannot be made in an index.

Stocks are subject to risks and fluctuate in value.

The Federal Housing Finance Agency's (FHFA) seasonally adjusted purchase-only price index is a gauge of prices of existing homes.

The Markit PMI is a gauge of manufacturing activity in a country.

The Markit Services PMI is a gauge of service-sector activity in a country.

The S&P/Case-Shiller Home Price Indices measure track changes in the value of the residential real estate market in major metropolitan regions.

The University of Michigan Consumer Sentiment Index is a measure of consumer confidence based on a monthly telephone survey by the University of Michigan that gathers information on consumer expectations regarding the overall economy.

VIX: The ticker symbol for the Chicago Board Options Exchange (CBOE) Volatility Index, which shows the market's expectation of 30-day volatility.

Yield Curve: Graph showing the comparative yields of securities in a particular class according to maturity. Securities on the long end of the yield curve have longer maturities.

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