Optimal Capital Director of Strategy Frances Newton Stacy breaks down how the Fed's interest rate hikes are weighing on corporate earnings, while also commenting on market outlook and labor market trends.
Video Transcript
SEANA SMITH: Major indices trading flat with just under an hour to go in today's trading session, and we're pretty much flat for the week with a lot of mixed data, both on the economy and also what we got from corporate America on the housing front. The latest out of there, existing-home sales declined, falling by 2.4% in the month of March.
Now, we also got the first full week of earnings revealing a lot about the consumer. Procter & Gamble saying that consumers are being more careful and more cautious with the products that they've purchased.
And earlier this week, Cleveland Fed President Loretta Mester telling Yahoo Finance that she believes economic growth is going to continue to slow this year as the central bank attempts to tame inflation.
Joining us now, we want to bring in Frances Newton Stacey of a capital director there-- of Optimistic Capital. Frances, it's great to see you.
So lots of mixed data. I think a lot of it pointing to the fact that the economy is continuing to slow. How is this shaping your expectations here for the markets, at least in the short term?
FRANCES NEWTON STACY: Well, in the short term, we have the S&P overbought. And if it doesn't hold 4,130 on the close-- which is looking like it's going to do that maybe today or maybe not-- it's going to probably revert to the mean 3,935 and the short-term mean, which is still the higher low pattern. However, you know, attendant to slowing growth, slowing-- decelerating inflation is usually a profits recession, and we're seeing some early evidence of that in some of the beats that we've seen. JPMorgan, for instance, has an idiosyncratic factor to it in that, you know, they gained a lot of deposit base because people were leaving smaller and regional banks for them.
But this is what happens, and then the profits recession sort of leads into a credit situation. Now, we did see the SVB issue, and I liken it to kind of plugging holes in boats. But we're likely to see more of that because the tightening that the Fed started in March of 2022 really hasn't fully worked its way into the system as far as rates go.
We've already hit that liquidity-- that liquidity threshold in the system where they had to already come in with a bailout, which put 63% of what they had already reduced back onto the balance sheet. It took them 9 to 10 months to get almost half a trillion off of the balance sheet, and they put 63% of it back in two weeks.
So all of these signs, including real incomes going down, capex spending going down, manufacturing going down, all of these are quintessential signs, and then you get to the labor market. And it is the lagging-- laggiest of the laggards of lagging indicators, and even now we're starting to see the early signs of the labor market rolling over. So all of this bodes for, unfortunately, more trouble ahead.
DAVE BRIGGS: You mentioned SVB and the impact on rates earlier this week. Cleveland Fed President Loretta Mester spoke with Yahoo Finance and had this to say about growth in '23.
LORETTA MESTER: Now, even before the stresses in the banking industry in March, banks were already beginning to tighten their credit standards, and that's because interest rates have moved up, but that's the typical way monetary policy transmits into the broader economy.
So the question now going forward is will stresses in the banking industry, those stresses in March, lead banks to move faster to tighten their credit standards? And if so, credit will become less available, and that has the same kind of impact on the economy as tightening of monetary policy.
DAVE BRIGGS: It's a lot to put on your plate here. But will this credit squeeze continue? How will the squeeze play out? And how significant will that essentially equate to a de facto increasing of rates?
FRANCES NEWTON STACY: Well, interestingly enough, yes, of course they're going to continue to tighten their lending standards. And when you think about, you know, how does this impact the system? OK, so you've got a lot of corporate bonds maturing, right? This is just one of the factors.
And particularly those profitless companies that had the junk ratings that, you know, initially borrowed at 4.5%, now they're going to be looking at rolling over that debt at 8%. Can they even afford to do that?
Credit not being available-- you're going to see, you know, businesses failing. You're already starting to see an uptick in bankruptcies.
And then you go over to the consumer. You've got 60% of America living paycheck to paycheck. They have less than $500 in savings, and their-- you know, their credit-card payments are becoming ever more onerous with every rate hike, which I guess they're going to see another 25 basis points. And they're putting food and things like that on credit cards, which are still elevated. Even though inflation is decelerating, it's still going up.
So you have all of these pressures coming to a head at a time when you're reducing liquidity in the system. And historically if you look at the major bear markets of 2000 to 2002 and you look at the '08 global financial crisis, what happened? You had leverage in the system, way too much leverage in the system. You had bubbles. You raised rates. You burst the bubbles.
OK, now we have more leverage than ever before in the system attendant to inflation, those things together, and we've raised rates at a record pace and tightened at a record pace. So just the mechanics in the system haven't changed. I'm not saying that this is going to happen tomorrow. In addition to that, you have the debt-ceiling conversation.
So which one of these shoes drops first and which one drops when? I don't know. But all of that bodes for the fact that this is really a bear market rally akin to 2001, and basically the credit conditions are going to determine more weakness in the equity markets going forward.
SEANA SMITH: For instance, you mentioned the fact that you're seeing a tighter labor market here. Torsten Slok of Apollo, he was out with an interesting note this morning, and one of the graphs that he had pulled up is the fact that fewer companies this earnings season so far-- we're only about a week and a half in, but fewer companies are mentioning labor shortages. How tight is the labor market, and do you think it's more of a result of the fact that some of these workers are leaving the workforce, or are actually some of these people-- I guess we're seeing a little bit more displacement than maybe what we initially thought we were going to see?
FRANCES NEWTON STACY: Well, what was happening initially is people were being laid off, for instance, from tech, and then they were just running around and finding a new job. And so now you're seeing the uptick in jobless claims, and it's actually up 44% off of the low for continuing claims.
You know, you're seeing this happen because that's not happening because what they're having to deal with is they're having to deal with margin pressures to try and keep, you know, the earnings situation higher. And the costs have remained-- you know, inflation's been sticky. Costs have been high, so they're lowering costs. But what they're really probably not prepared for is coming-- the demand coming off of the top line that the rate that it probably will should we have more credit problems.
And, you know, that 60% of America that's living paycheck to paycheck, that's the majority of people, while the 40%, which are sort of defined by having assets and savings, are still spending. Also things that were kind of keeping the bubble inflated, if you will, was, you know, consumer spending and retail and savings and all of these things that, you know, came out of the pandemic. All of those things have rolled over simultaneously.
So it's just looking pretty dire. I don't like to be overly negative. It's just, you know, we have to look at the data. We have to be responsible. The risk is rising in the system for a credit event every single day because the tightening hasn't worked its way through the system. We're continuing to tighten. You know, now lending conditions are following those interest-rates hikes, as she pointed out. As is always the case, CNI lending is going down, and that's all liquidity falling out of the system when those loans are coming out.
DAVE BRIGGS: A healthy dose of skepticism about the markets indeed and the macro. Frances Newton Stacy, thank for joining us. Appreciate that.
