The effects of one of the most severe monetary policy tightening campaigns of the last 40 years are now beginning to show some considerable impact in the broader economy. We expect that first-quarter corporate earnings results and forecasts from company managements will be revised further downwards. Here is why:
- Labor market: While March’s non-farm payroll was still very exceptional, we note that job turnover ratio (expressed through Job Openings and Labor Turnover Survey – JOLTS) is falling to the lowest point over the last three years. Furthermore, statistics show that small and medium-sized businesses are publishing fewer job openings, and this occurs on the back of falling consumer sentiment.
- Lending: In the follow-up of the banking crisis, the issuance of new loans and leases at US-based commercial banks has dropped at its fastest pace for over 50 years. There are two related observations to this: i) 3% of small and medium-sized businesses report that credit facility renewal was impossible to process and 6 % reported that it was harder to get accomplished, and ii) US-based business bankruptcy filings have reached the level of 2010 – only in 2009 was a higher number was observed.
- Outlook: At this point in time, 78 corporations (according to FactSet) have announced that their first quarter results would be lower than the initial guidance. This is an usually high number, especially as the majority of these trimmed outlooks are coming from normally resilient tech and industrial companies. We would think that it is naïve to believe the broader economics will not follow suit.
Investment conclusion:
Investors who have stayed absent from the market for the last quarter or so may consider doing so since valuations are still high compared to the risk-premium. Furthermore, the broad growth outlook is still dim, hence the average investment may not perform as expected.
Investors who are required to stay invested are recommended to seek opportunities in high-growth opportunities such as the energy transition and the semiconductor industry which have, to some extent, become the backbone of the next generation opportunities.
Fixed income investors: Two observations of importance: a) the tightening of the interest cycle is coming to an end soon, and b) US corporations maintain a relatively high level of financial leverage, hence we would be expecting the number of bankruptcies to exceed the level of 2009. Given this, fixed income investors are advised to transit into medium to long-term durations fixed income opportunities of high-grade debtors.