Investors brace for Q2 earnings

The definition of a bear market is a decline of more than 20%. Some nitpickers argue the decline must unfold over a long time. If you are losing money, I'm not sure if it is better to be wiped out faster or slower?

Even those of us who were concerned when 2022 began, were not forecasting such a dire six months as has unfolded. We knew that companies with little or no earnings were selling at astronomical prices. We knew that inflation, in check for a decade, was surging all around us. We knew that all the cash the Federal Reserve and the U.S. Congress pumped into the economy had to go somewhere and that turned out to be stocks and housing. Both categories became overpriced. The last such collapse was simultaneous with the last serious surge in inflation in the early 1970s.

The definition of a bear market is a decline of more than 20%. Some nitpickers argue the decline must unfold over a long time. If you are losing money, I'm not sure if it is better to be wiped out faster or slower? The S&P 500 was off 25%, the NASDAQ roughly 35% and Bitcoin lost 60% of its value in the first half. The estimated losses of $8 trillion equal the total of the Government CARES Acts 1, 2 (Trump) and 3 (Biden).

With perfect hindsight, we now know the Fed was a year late in raising interest rates. We are horrified at the prices we are paying to put gas in our cars. A trip to the grocery store is equally dismal. The cereal boxes are smaller and the price is higher. Fresh fruits and vegetables are truly expensive. Check out the price of protein: fish, chicken, and beef at record prices.

The argument six months ago was about whether we would have a recession, would it be deep or shallow, or would the Fed be able to slow the economy without having one at all. GDP in Q1 was -1.5%. It's highly likely the economy contracted further in Q2. Guess what? The definition of a recession is two consecutive quarters of decline. So, the big debate about next year might be quite moot unless things get worse.

Please note the following regarding inflation: Oil prices may have already peaked. Energy was the bright spot in the first half so many investors rushed in during June, rather late to that party. Brent crude traded at $120 a month ago and is at $103 this week. Natural gas reached almost $9 in June and is now at $5.57, -38%. In May 2021, lumber peaked at an all time high of $1,711 and is now $640, a drop of 62%. You can see a picture developing here and it doesn't match the conversation among the talking heads, now does it?

Phase one of this historic purge has been the downward correction in the multiples of companies with no earnings now or for the next few years. Stocks of that ilk that will survive are those with big bank balances, no debt, and declining losses. The next challenge for investors is what will happen as Q2 earnings are reported and if companies revise downward their expectations for 2023.

Remember, markets must stop going down before they can start going up again. I think the "Buy the dip" crowd has now been sufficiently bludgeoned as to make them more cautious about grabbing at falling knives. There are still many economic uncertainties before us. The first game-changer would be clear-cut evidence inflation is subsiding beyond some anecdotal signs it is.

The next would be improving optimism for next year as the many supply chain dislocations in the economy start to correct like semiconductor chips to complete cars on the production line. The third would be recovery in some very oversold stocks that everyone used to love and now hate.

Joan Lappin CFA has been called an "investment guru" by Business Week and a "top manager" by the Wall Street Journal. The Sarasota resident founded Gramercy Capital Management, a registered investment adviser, in 1986. Email JLappincfa@gmail.com. Follow her on twitter: @joanlappin. Her past columns appear at heraldtribune.com/business/columns.

The definition of a bear market is a decline of more than 20%. Some nitpickers argue the decline must unfold over a long time. If you are losing money, I'm not sure if it is better to be wiped out faster or slower?

Deduced Reckoning

Joan Lappin

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