Market Outlook, the Broken Seesaw, and Year-End Checklist, Terry Gardner, CJ Lawrence 11.16.22

In this video, Terry Gardner discusses the current equity market backdrop, 3rd quarter earnings, and the broken seesaw. Finally, Gardner highlights the importance of a year-end financial check-up.

Terry Gardner Jr.:

Hey, good afternoon, everyone. It’s Terry Gardner from C.J. Lawrence. It’s Wednesday the 16th of November. Coming to you from the C.J. Lawrence Global Headquarters here in Midtown Manhattan. We’ve got some market commentary for you today. And four quick points that we’d like to cover.

First, we want to look at third-quarter earnings and see how they’ve come in versus expectations. Secondly, we want to take a look at some of the information that we look at and discuss at our investment committee meetings that we hold here at C.J. Lawrence. And then third, we want to talk about the broken seesaw that we experienced in the third quarter with regard to prices of asset classes. And then, finally, look at kind of a year-end checklist of some things that we should be staying on top of as we start to reach the end of 2022. So first off, concerning earnings, about 92% of the companies in the S&P 500 have now reported 70% of those have posted a positive surprise on average over the last couple of decades.

That number’s closer to 80%, a little below past averages. Nonetheless, the majority of companies that are reporting are reporting better than expected forecasts. Growth for the quarters coming in at about 2.2%, and that’s come down over the last several months. So that’s something to keep an eye on. Growth expectations now for the fourth quarter for earnings are down 2%. So, we’re starting to really see some erosion in earnings forecasts for this quarter, next quarter, and into the first quarter of 2023, which is expected to grow only 1.7%.

Earnings now for the full year 2023 are expected to grow by 5.8%. That estimate was closer to 10% at the beginning of the year. So clearly, a ratcheting down of expectations as to where earnings will go in the coming quarters and the year. And we need earnings to grow in this environment where we have higher interest rates, which compresses the PE multiple on stocks. It’s incumbent on earnings to grow to move stock prices higher.

So, I want to talk about what I mentioned earlier: the seesaw in asset prices that we saw in asset price performance in the third quarter. So, we just talked about earnings. Now we want to talk about prices.

And the broken seesaw is how we describe what happened between stocks and bonds in the quarter. Usually, over history, one offsets the other. When you have strong stock price performance, you often have weaker bond performance and vice versa. When bonds are strong, stocks tend not to fare as well.

But in the third quarter of this year, the seesaw broke. Both sides were down. In fact, I outlined this in our quarterly letter to clients if you’re interested, I’m happy to share it with you, but a couple of numbers that I cited were S&P 500 declined 5.2% in the quarter. Meanwhile, if you look at the Morningstar 10-plus year treasury bond index, that fell by more than 10%.

Why is it meaningful? It rarely happens. It happens less than 10% in the quarters measured back to 1926. So, it was a remarkable quarter from that perspective. Now we’ve seen the seesaw get some repairs in the fourth quarter. Stocks are up nicely, bonds are up, but not as much. So, there’s a differential there. The S&P 500 quarter-to-date is up 11 points a 5%. So that’s coming off a bottom and some weakness in the third quarter. Meanwhile, the short-term bond index is up 92 basis points. The long-term bond index on a total return basis is up 75 basis points.

So with that all in the backdrop and with a meaningful rebound in stock prices in the fourth quarter and with the earnings outlook, as we suggested earlier, being somewhat tepid, it’s tough to make a very bullish case for the indexes to advance broadly in the coming year. But you can make a bullish case for certain stocks to perform well. And that’s kind of where we’re staying focused. We are becoming increasingly selective and focused on those companies that can grow earnings despite the macro backdrop.

So, where do we find those outperformers? I mentioned in the introduction how I would share a little work from our investment committee meeting. We meet every Wednesday here at C.J. Lawrence, discuss the stocks in our portfolios, our stock-bond mixes, and we look each week at a table created by C.J. Lawrence Inc.

The old C.J. Lawrence was back in the 1980s by our chairman, Jim Moltz, and has been updated ever since then called Sector Shifts. And it just essentially tracks the weighting of the different sectors within the S&P 500 index, and it’s interesting to look at how these sectors grow in their influence or wane in their influence over time.

And so what we’ve highlighted, certainly, and it’s been well-reported, the rollover and the technology waiting within the index, which peaked at around 29%, is now down to 26.5%. That’s quite interesting. At the same time, energy has found its legs again. Energy as a percentage of the 500 troughed in 2020 and about 2.3% now is about 5.4%. So, we look at these long-term sector shifts and sector changes within the index.

If you can catch a wave either up or down, sometimes the influence in the index can change over a long period, and you can find interesting opportunities within those sectors that are gaining in waiting within the index. The one that we have been highlighting a little bit is industrials, which now stands at about eight and a half percent of the index, probably troughed in 2021. It’s 7.7. It’s down from 2010, which was 11%. So the point is that, hey, that’s a fertile area to look for some interesting new ideas, some names that might be benefiting from new secular changes in the economy. And we highlighted a couple of themes within the sector that we’re watching quite closely and investing against, including defense, advanced manufacturing, robotics, reassuring supply chain repair and reconstruction, those are all themes that are evolving and changing within the industrial sector, and within those themes are some really interesting new opportunities, which we’ve been investing in over the last six months and plan to continue to do so.

So that’s certainly an area, despite index challenges, where there are individual sectors and stock opportunities. So finally, it’s getting close to year-end. From a planning perspective, it is important to dust off those checklists and make sure that everything’s squared away going into year-end. We do a lot of that here at C.J. Lawrence. We’re engaged now in tax loss harvesting as we get closer to the end of the year. It’s an important time to be also focused on any charitable contributions that you want to make at year-end here in addition to contributions to retirement plans, considering Roth conversions, Roth IRA conversions, contributions to health savings accounts, 529 plans, including 529 able plans.

So, we’re discussing many of these issues and activities with our clients. All should be thought about at year-end. There’s some leeway in some of these areas up until tax time in April, but we think it’s good to stay as close to a calendar year process as possible. So if you’d like to discuss these or any other investments in your portfolio, feel free to give us a ring here. My number is 212-888-6403, or you can email me at tgardner@cjlawrence.com. Thanks, and have a great rest of your week.