July 28, 2023

Testing, Testing, Testing W&A

Testing Testing Testing W and A scaled

Bottom Line:


Last week, we presented The 2023 Halftime Report, our outlook for the remainder of the year, which called for pleasantly surprising disinflation, economic resilience, earnings strength, and investor returns. A week later, we received a full spray of data with which to test our predictions.  Fortunately, our forecasts held.  The Fed increased rates to 5.5% but gestured toward a persistent pause. For the 2nd quarter, the US economy grew more than expected due to inflation that grew less than expected, and earnings releases have beaten expectations.  Based upon this week’s data deluge…the summer sun still shines on our forecasts, and still shines on the bulls.


The Full Story:


For those of you who took the time to tune in live or watch the replay of our 2023 Halftime Report, THANK YOU!  We hope you found the material informative and reassuring. For those of you who were not able to tune in, here is the last slide from the presentation with our predictions to summarize:


Screenshot of a slide from the 2023 Halftime Report with David S. Waddell summarizing the first half of the year economically, and David's predictions for the second half of 2023.


Having now gone global with our predictions, each Fed meeting, each earnings report, and each economic release carry an even higher charge for us. Fortune-telling is an unforgiving business! Well, this week we had several big announcements from the Fed, the economy, and corporations, providing us ample evidence to test our halftime theses against. Here’s our report card on the week:


Test 1: The Fed  


As expected, the Fed raised the overnight interest rate by another .25% up to 5.5%, the highest level in 22 years. During his informal remarks, Powell maintained a neutral stance, neither committing to higher rates in September nor to another skip.


He instead directed us all back towards the data. The inflation data. As Powell reiterated, the Fed is “data dependent”, with multiple inflation and employment reports on tap before the September FOMC meeting. For those looking for additional rate hikes, Powell seems satiated at these levels. Within Q&A, he offered the following reassurance:


I’ll close by saying; we’ve raised the federal funds rate now by 525 basis points since March 2022, monetary policy we believe is restrictive and is putting downward pressure on economic activity and inflation.


In other words, they have done enough unless inflation breaks trend and begins persistently surprising to the upside. Rate increases are no longer the default policy, but don’t expect any cuts. Powell sees rates remaining at this level for “quite some time” to act as a governor on overall activity while the lagging effects filter through the economy.  Welcome to Powell’s persistent pause.


Test 2: The Economy


The day after Powell unveiled his persistent pause, the BEA released its first read on second quarter GDP. While analysts expected growth of 1.8%, the US economy grew by 2.4%. This “hot” number led to a shift higher in longer-term interest rates, leading to a sharp shift lower in stock prices.


After a record-setting streak of up days for the Dow, with frothy technical and sentiment setups on trigger, we welcomed the pullback. But remember, the Fed now believes that recession-free disinflation is possible and found thesis support deeper within the release.


Second quarter core inflation fell from 4.9% to 3.8%. The headline inflation number, which includes food and energy price changes, fell from 4.1% to 2.6%. That’s a significant collapse and well below expectations. Also recall that GDP growth BENEFITS from disinflation, as inflation subtracts from real growth.


So did the economy surprise to the upside or did inflation surprise to the downside?  If you ignore the inflationary effects, nominal GDP growth fell from 6% in Q1 to 4.6% in Q2, while inflation adjusted GDP rose from 2% to 2.4%. Therefore, the “hot” GDP report was more like a “cold” inflation report… which should edify Powell’s persistent pause.


Test 3: The Corporations


So far, a third of S&P 500 companies have reported their Q2 earnings. Of those that have reported, 77% have beaten analyst’s expectations by 7%, on average. I’ll spare you the granularity here as it’s still early in the season, which largely concludes over the next couple weeks. Suffice it to say that our thesis calls for upside surprises and, to this point, the surprises have arrived on schedule.


A chart displaying the percentage that S&P 500 companies reported earnings above or below the consensus estimate at the time of the earnings report every year since 1987.


In summary, the data deluge this week supports our halftime predictions for a Fed pause, disinflation continuance, and economic and earnings upside surprises…all very supportive for stock prices. Only five more months of forecaster anxiety to go before 2024!


Have a great weekend!


David S. Waddell  

CEO, Chief Investment Strategist




Sources: Yardeni Research, W&A Predictions
David Waddell
Author: CEO Chief Investment StrategistAfter graduating from the University of the South with a BA in Economics, David began his career with Charles Schwab & Co., Inc. in Phoenix, AZ. Having been recognized for his outstanding business development record, David was promoted to the San Francisco- based Institutional Strategic Accounts Team, which interfaced with the Big 5 accounting firms and Schwab’s largest customers. David left Schwab to continue his education at the graduate level in Boston. While earning his MBA degree with a concentration in finance and investments at the F.W. Olin School at Babson College, he was appointed by the college Trustees to manage a team of seven portfolio managers overseeing the student-managed portion of Babson’s endowment fund. David also founded the Babson Investment Management Association to assist undergraduate and graduate students with training and career path planning in the investment management field. As the firm’s Chief Investment Officer, David chairs the W&A investment committee and combines macro economic forecasting, macro market analysis and macro risk assessments to design portfolio strategies utilizing public market securities worldwide. A civic leader in Memphis, David currently acts as Chairman of Epicenter Memphis, and Co-Chair of the Memphis Chamber Chairman’s Circle while also serving as a board member for LaunchTN and the New Memphis Institute. David previously served as chairman for The Leadership Academy, the RISE Foundation, and the Economic Club of Memphis. He also chaired the capital campaign to build the “Live” stage at the Memphis Botanic Garden. David was a member of the 2004 Leadership Memphis class and has been recognized as one of Memphis’ “Top 40 under 40” by the Memphis Business Journal, and as a finalist for “Executive of the Year” in 2007. In addition to weekly columns in the Memphis Daily News and the Nashville Ledger, David has appeared in the Wall Street Journal, USA Today, Forbes, Business Week, Investment News, Institutional Investor News, The Tennessean and Memphis Business Journal. He has also made appearances on Fox Business News, Yahoo Finance, Bloomberg TV, CNBC, and CBS News and ABC News Channels. Read some of David's articles on his author page in Inside Memphis Business. David has two wonderful children, Easton and Saylor, an obedient Labradoodle named NASDAQ, and a devoted Goldendoodle named Ripley.


David S. Waddell


Chief Investment Strategist

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