Sifting Through the Damage, Terry Gardner, C.J. Lawrence Market Comment 051822

Terry Gardner (00:02):
Hi. Good afternoon, everyone. It’s Terry Gardner from C.J. Lawrence on Wednesday, May 18th, in the midst of a fairly meaningful market sell-off. We want to come to you with some commentary today and cover four points.

Terry Gardner (00:15):
The first is, let’s put the current sell-off into some historical context. Secondly, we want to take a look at the breakdown in the market’s defense this week. Third, let’s examine some S&P sectors and earnings prospects for this year and next, and then finally highlight a couple of areas that we think are attractive in the stock market.

Terry Gardner (00:39):
First off, where are we now in this market sell-off versus previous sell-offs? I excluded the financial crisis of 2007, and 2008, because I don’t believe that the ingredients for that market decline are consistent with where we are today. I did look then at the past three sell-offs, which included the period from May 2015 to February 2016. In that nine-month period, the S&P 500 declined 14.2%.

Terry Gardner (01:15):
The second period I looked at was, we’ve discussed this one fairly frequently in past videos, October 2018 through December 2018. In fact, the market bottomed on Christmas Eve, and during that three-month period, the S&P 500 sold off 19.6%. And then of course the COVID period, February 2020 through March 2020, in one month, the S&P declined 33.6%. Where are we now? Well, the S&P 500 peaked on January 4th of this year at the beginning of the year, and as of the close today, we’re down just north of 18%, so within the boundaries of previous sell-offs.

Terry Gardner (02:02
A little more dramatic than the ’15, ’16 period, but a little less dramatic so far versus the 2018 period. It was starting to feel like we were beginning a bottoming process until point number two until the defense broke this week. And what I mean by that was we had earnings out from two perennial retailers, Walmart and Target, this week. Both of them missed expectations with regard to their earnings for the previous quarter, citing margin pressure inflation, and inventory builds. And the reason why that was significant to the stock market was that those are two companies that are considered to have the best execution in the business. I think the fear was yesterday and today that if they can’t manage inflation and margin pressure, then who can, and that’s creating some consternation in the market that is impacting consumer discretionary and staples companies across the board.

Terry Gardner (03:14):
Could this have been forecasted? No, not sure. There’s a lot of criticism of the companies for not having disclosed the shortcomings previously. I thought something was noteworthy. We’re taking a look at the earnings performance for the first quarter of 2022, and looking to see where expectations were being set for this current year and for next year. And notice something with regard to consumer staples that I thought was noteworthy. At the beginning of this year, consumer staples stocks were expected to grow 5%, and this is looking at the S&P consumer staples sector. Last week, they were expected to grow 3%, so earnings expectations in the staples sector have been ratcheted down since the beginning of the year for 2022. The same goes for 2023. The staples estimates were for 9% growth at the beginning of this year. And they’ve been ratcheted down to 7% growth. This is for 2023 as of last week.

Terry Gardner (04:25):
Perhaps there were some clues as earnings expectations were ratcheted down, that margins would be coming under pressure, and that was being built into analyst forecast for this year and next. We took a look to see, are there other sectors where that has been happening? And in fact, it has been happening in the consumer discretionary sector, which is heavily influenced by the heavyweight Amazon, so it’s somewhat understandable that expectations would’ve been ratcheted down over the last couple of months for this year and next in the discretionary sector.

Terry Gardner (05:01):
Where estimates have been going up has been in technology. It defies the narrative that we’ve all been hearing of, as multiples have been compressed, and that would impact negatively technology stocks. Interestingly, at the same time, earnings expectations in the sector have been on the rise. In fact, at the beginning of this year earnings expectations for 2022, were at about 8.5% for the technology sector. They’re now at about 12%. And for next year earnings expectations coming into this year were about 8% growth. Now they’re about 11.2% growth.

Terry Gardner (05:42):
Interesting to note that within the market there are some sectors where earnings expectations are on the decline, and some, where earnings expectations are on the rise. And I think that’s important because it gives us some window into what groups within those sectors can withstand inflationary and margin pressures. And when you dig into that technology sector, earnings expectation performance, it’s really software that stands out as a group that can do well, even in an inflationary environment.

Terry Gardner (06:19):
To our final point, highlighting a couple of sectors or groups at the next level down that aren’t necessarily immune to inflation and margin pressure, but are perhaps better able to withstand or survive and thrive in environments of inflation and margin pressure. We took a look at a couple of others which included software, whereby the group is down 23% year to date, yet earnings expectations are for 16% growth next year.

Terry Gardner (06:53):
Semiconductors and semiconductor equipment are notoriously volatile, boom-bust sectors or groups. We would contend that perhaps the cycle will be a lot longer, given the supply constraints and the long demand tail for semis as content within consumer goods rises. Semis are down 24% this year. Expectations for earnings are for growth of 10.5% next year.

Terry Gardner (07:25):
Healthcare providers, are certainly not immune to inflation, but are somewhat able to forecast their premiums and their growth for the coming year and next. Those stocks are flat this year and earnings expectations are expected to grow about 11% next year. And then finally insurance was another group that we identified as having some other cycle beyond the broader economic cycle to propel earnings. Those stocks are down 2% on the year, with earnings expectations up 14.5% For next year. There are some pockets of resistance if you will, or some areas to focus on, to concentrate on, and we’re really digging into names within these particular groups.

Terry Gardner (08:14):
If you’d like to discuss this further, feel free to give me a ring at 212-888-6403, or shoot me an email at Have a great rest of your week.

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