Latest Economic Review: Sunpointe Illuminations

November 2022

Markets surge higher on the “colder” than expected CPI report, potential Fed pivot

Equity markets and other risk assets rocketed higher on November 10th after the October CPI reading came in “colder” than expected. The headline reading rose 0.4% month-over-month and 7.7% year-over-year (Y/Y), below the estimate of a 7.9% increase. Stripping out the volatile food and energy components, Core CPI rose 6.3% Y/Y, below the market’s 6.5% expectation. A 2.4% decline in used vehicle prices helped bring down the inflation figures. Apparel prices fell 0.7% and medical care services declined by 0.6%. Shelter costs, which make up one-third of the CPI, rose 0.8% for the month, the largest monthly gain since 1990, and +6.9% Y/Y, their highest annual level since 1982. Further, fuel oil prices exploded 19.8% higher for the month and are up 68.5% on a 12-month basis.

The decline in inflation was received particularly well by both the equity and bond markets. The Fed Fund Futures immediately priced in a 50-basis point rate hike in December as opposed to a more hawkish move of 75 basis points. One month of declining inflation does not make a trend and the headline and core readings remain well above the Fed’s 2% target. Inflation and interest rates may indeed be peaking, and we believe equities and other risk assets could perform well moving forward if the Fed can begin to provide some certainty on future monetary policy.

Are we finally seeing labor markets & PMIs catch up to the weaker economic picture?

The October employment report exceeded expectations with 261,000 new jobs added to the economy versus the 205,000 estimate. One surprise was the tick higher in the unemployment rate to 3.7%, slightly higher than the 3.5% forecast. Health care led job gains, adding 53,000 positions, while professional and technical services contributed 43,000 and manufacturing grew by 32,000. Average hourly earnings grew 4.7% from a year ago and 0.4% for the month, indicating that wage growth is still likely to serve as a price pressure as worker pay is still well short of the rate of inflation.  While the labor market remains one of the key bright spots in the U.S. economy, there are signs of slowing in the rate of growth, and layoffs have picked up in key sectors over the past month.

Manufacturing activity in the U.S. remained stable in October as the ISM Manufacturing Index fell from 50.9 in September to 50.2. Employment, production, and new orders all strengthened during the month, but new orders remain in contraction territory. In addition, prices, supplier deliveries, and inventories weakened. While pricing pressures and supply chain issues appear to be easing, respondents are increasingly citing the rising risk of recession and the cancellation of orders as major risks.

The ISM Services PMI weakened a bit in October, as it fell from 56.7 in September to 54.4 in October. Business activity, new orders, and employment all weakened last month. Services also exhibited weakness last month, but the PMI remains well above 50 and continues to provide key support for U.S. economic growth.

Companies are very good at managing earnings; the key question is whether 2023 estimates are too high?

Through 85% of the S&P 500 Q3 earnings season, 70% of companies have beaten earnings estimates and 71% have beaten on revenue expectations. The aggregate earnings growth rate has been 2.2%, slightly below the 2.7% forecast at the start of the quarter. Energy, real estate, and industrials have led the way while communication services, financials, and materials have posted the biggest decline in earnings. Revenue growth of 10.5% is above the forecast. Analysts expect EPS to fall 1% in Q4 but grow 5.6% for all of 2022. The analyst community currently projects earnings growth of 5.9% in 2023 with revenue growth of 3.4%.

Lackluster earnings finally hits mega-cap tech

The four largest stocks in the S&P 500 today are Apple, Microsoft, Amazon, and Alphabet – these stocks collectively represent 18% of the index (down from 22% at their peak). Apple reported strong Q3 earnings, but the other three reported lackluster earnings and their stock prices declined. Through 11/10/22, these four mega-cap tech names were down 26% year-to-date while the S&P 500 was down only 17%. The one characteristic most associated with large cap technology stocks, superior sales growth, has not persisted in 2022. During the period of 2010-2021, these four technology stocks grew sales at an annualized clip of 18% versus 5% for the S&P 500. This has reversed in 2022, with sales growth of these four companies at 8% versus the S&P 500 at 13%. Perhaps the year-to-date underperformance makes sense, but mega-cap tech is forecast to regain its sales leadership in 2023 and 2024.

Chinese growth may be hamstrung until it lifts the zero tolerance COVID policy

The Chinese economy grew at a 3.9% annual rate in Q3, up from 0.4% growth in Q2. While the headline figure beat expectations, it is well below the government’s official target of 5.5%. Exports, a major driver of China’s growth, beat expectations with an increase of 5.7% in USD terms in September. However, imports in USD terms only rose by 0.3% in September from a year ago, missing the analyst forecast of 1% growth. Finally, retail sales rose 2.5% Y/Y in September, below the forecast of 3.3% growth. Most of the growth came from auto sales which surged 14.2%. China’s economy looks weak right now with declines in manufacturing and services. Consumer spending has been challenged and that looks set to continue with rising COVID cases and persistent lockdowns. Until the country changes its zero tolerance COVID policy, the world’s growth engine may not fully recover.

Eurozone ekes out slight growth in Q3, but exhibiting significant weakness at the start of Q4

The eurozone economy grew 0.2% quarter-over-year in Q3 or 2.1% Y/Y. Major countries eked out slight growth, but the forecast looks bleak moving forward. The economic backdrop in Japan remains resilient with supportive fiscal and monetary stimulus boosting economic growth. While inflation is low in Japan, it has increased and is a concern like most other global economies. The eurozone economy registered its fourth successive month-on-month contraction in private sector business activity at the start of the fourth quarter.

The rate of decline was the sharpest since November 2020 and, excluding those months affected by pandemic restrictions, marked the deepest downturn since the first half of 2013. A steeper reduction in manufacturing output was accompanied by an accelerated decline in service sector activity during October. Underpinning downturns across each sector were further slumps in new orders, with uncertainty, high prices, and generally weak underlying demand conditions cited by survey respondents.

Brazil has been one of the bright spots in the global economy and financial markets this year!

Luiz Inácio “Lula” da Silva won the hotly contested Brazilian presidential race over rival and incumbent president Jair Bolsonaro who has yet to concede defeat. The Brazilian real has been one of the few currencies in the world to have gained ground against the U.S. dollar this year, up roughly 5%. The main reason is the assumption that the country’s central bank is further ahead of the Fed in its monetary tightening cycle. Base interest rates in the country have been running at 13.75%, and inflation has subsided over the previous three months. Unemployment has also been trending down, and GDP estimates revised upward, a sign that the overall economy remains resilient in the face of the current global crisis.


The charts and information in this presentation are for illustrative purposes only, and are based upon sources of information that Sunpointe, LLC generally considers reliable, however we cannot guarantee, nor have we verified, the accuracy of such independent market information. The charts and information, and the sources utilized in the compilation thereof, are subjective in nature and open to interpretation. FOR USE WITH INSTITUTIONAL INVESTORS AND INVESTMENT PROFESSIONALS ONLY. NOT FOR PUBLIC DISTRIBUTION. PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.