FedEx issues a warning … why inflationary data is less relevant than before … the real indicators to watch … the S&P falls through a critical support level
If Raj Subramaniam, is correct, we’re headed into a global recession.Subramaniam is the CEO of FedEx. And given that FedEx’s business is to ship products all over the world, its earnings and the analysis of its leaders provide keen insight into the shape of the global economy. This is why FedEx has been seen as an economic bellwether for decades.Right now, FedEx’s earnings and its CEO are sounding the alarm.Here’s CNBC with more:
FedEx CEO Raj Subramaniam told CNBC’s Jim Cramer on Thursday that he believes a recession is impending for the global economy.“I think so. But you know, these numbers, they don’t portend very well,” Subramaniam said in response to Cramer’s question of whether the economy is “going into a worldwide recession.”The CEO’s pessimism came after FedEx missed estimates on revenue and earnings in its first quarter. The company also withdrew its full year guidance.Shares of FedEx fell 15% in extended trading on Thursday.“I’m very disappointed in the results that we just announced here, and you know, the headline really is the macro situation that we’re facing,” Subramaniam said in an interview on “Mad Money.”
Subramaniam went on to blame weakening global shipment volumes for FedEx’s disappointing results.Meanwhile, FedEx stock lost 21.4% on Friday.
This is likely the first of many bad earnings reports in our near future
On this note, let’s jump to legendary investor, Louis Navellier, from last Friday’s Accelerated Profits Flash Update podcast:
[The poor FedEx earnings result] is going to be the first of many disappointments that you’re going to hear from a lot of the big multinationals…It’s going to be every stock for itself in the upcoming third quarter announcement season.
The numbers back this up.For these details, we’ll turn to FactSet, which is the go-to earnings data analytics company used by the pros:
Given the decline in U.S. GDP in the first quarter and the second quarter, are analysts lowering EPS estimates more than normal for S&P 500 companies for the third quarter?The answer is yes.During the months of July and August, analysts lowered EPS estimates for the third quarter by a larger margin than average.The Q3 bottom-up EPS estimate (which is an aggregation of the median EPS estimates for Q3 for all the companies in the index) decreased by 5.4% (to $56.21 from $59.44) from June 30 to August 31.
FactSet continues that the decline in the bottom-up EPS estimate recorded during the first two months of the third quarter is greater than the 5-year average, the 10-year average, the 15-year average, and the 20-year average.Meanwhile, nine out of the 11 sectors have seen earnings reductions. The two that haven’t are real estate and – surprise, surprise – energy.(For months now, Louis has been begging readers to load-up their portfolios with top-tier energy stocks, while making specific recommendations to his Accelerated Profits subscribers.)If we look at the entire 2022 calendar year, the bottom-up EPS estimate decreased by 2.8% from June 30 to August 31.You might recall that just a few months ago, analysts were still increasing their 2022 earnings projections, which we openly questioned here in the Digest.
Meanwhile, on the inflation front, be aware of what’s coming – and be ready to shift your focus
It’s likely that the inflation statistics in October and November will show continued easing.Remember that last year we saw large inflation spikes. And since inflation measures the change between “then” and “now,” a “big number” a year ago versus a “big number” today equals a small number.Yay! Inflation is over!I’m sure you see the foolishness of this.What matters isn’t the headline inflation rate, it’s the impact of persistent high prices on the consumer.As a simplistic illustration, if the price of a hamburger explodes from $5 to $15, that’s 200% inflation. But let’s say the hamburger’s price remains at $15 the following month.Well, $15 last month compared to $15 the next month means 0% month-over-month inflation.Hurray! The economy is saved!This fall, it’s likely we’ll see many headlines celebrating decreasing inflation. To the unassuming reader, it’s going to paint a rosy picture of an economy on the mend.Perhaps. But investors should take that rosiness with a grain of salt.Yes, inflation has taken the spotlight for many months – deservedly so. But inflation is longer the best gauge of the challenges facing everyday Americans. How could it be when our starting comparison values are now at nosebleed levels themselves?
The main reason inflation matters is because of the Fed’s response
But if we take the Fed members at their word, even if we see easing inflationary data, they won’t be quick to become dovish.
They’ve explicitly said they’ll hold rates at high levels for “some while” before easing up.So, falling inflation isn’t necessarily going to prompt the Fed to change course in the near future. And that means during any upcoming time of improving inflation data, the Fed’s high rates will continue inflicting damage on the economy.This is why I’m arguing that inflation data is less relevant now than before.Today, the spotlight needs to focus squarely on the economy itself. And the economy breaks down into business earnings and consumer health.
So, how do things look when this is our focus?
Well, at the top of this Digest, we covered two bright red warning signs for businesses earnings: FedEx and reduced Q3 earnings forecasts.We could also add the incredible strength of the U.S. dollar to that list. Louis often says that a strong dollar crushes the earnings of S&P multinational companies who generate lots of revenues from overseas.Meanwhile, over on the “consumer health” front, let’s move away from the headlines that tell us how strong the labor force is (in past Digests we’ve detailed how the headline number is masking a record number of Americans working two full-time jobs just to stay afloat).Instead, let’s look at the underlying condition of the people making up that labor force.From Yahoo! Finance:
Seventy-two percent of Americans would experience financial difficulty if their paychecks were delayed for a week, according to results from the 2022 “Getting Paid In America” survey conducted by the American Payroll Association (APA). This is a nine percent increase from the 63 percent of individuals who indicated they were living paycheck to paycheck in 2021 the survey.
A common pushback to this goes “but consumers are still spending.”Yes, but are they spending with cash left over after paying all their bills?Nope. With credit cards.Here’s CNBC:
There’s no doubt Americans are falling deeper in debt.As prices jump across the board, consumers are increasingly relying on credit cards to make ends meet.The number of people with credit cards and personal loans hit record highs in the second quarter of 2022, according to TransUnion’s latest credit industry insights report.The tally of total credit cards exceeded 500 million for the first time ever, led by originations among Generation Z, or adults ages 18 to 25.Overall, an additional 233 million new credit accounts were opened in the second quarter, the most since 2008, according to a separate report from the Federal Reserve Bank of New York.Credit card balances also jumped 13% during the second quarter, the largest year-over-year increase in more than 20 years.
But hey, that $15 burger is about to show 0% inflation, so you have nothing to worry about!
Shifting over to the stock market itself, the S&P broke a critical support level on Friday
As the market has drifted lower in recent weeks, 3,900 has been the key level to watch. This is because it has served as support and resistance numerous times since the spring.Last Friday, 3,900 didn’t hold, as you can see below.
As I write Monday, it remains below this level as the S&P is down slightly.This break of key support doesn’t mean the S&P is fated to fall further – it could stage a strong rally this week – especially if the Fed says anything surprisingly dovish on Wednesday.But breaking 3,900 increases the likelihood that we fall further, first retesting the 3,790 level. And if that doesn’t hold, the June-low of about 3,666.Meanwhile, keep your eyes on the 10-year Treasury yield. It’s at 3.5% as I write, the highest level since 2011.With the S&P 500 dividend yield coming in only 1.65%, and stocks falling beneath a key support level, do you think some money will flow out of stocks over to a 3.5% yielding 10-year Treasury? It’s just another headwind for stocks today.Looking big-picture, it feels counterintuitive to write this, but it’s time to stop obsessing over the inflation data.Yes, it’s very important, but as the Fed keeps hiking rates and holding them at elevated levels, inflation is less relevant. The more impactful issues for your portfolio become corporate earnings, the health of the consumer, and the level of the 10-year Treasury yield.We’ll keep you updated.Have a good evening,
Jeff Remsburg
