Three “Data” items today:
Topic #1: Starting off on a positive point, US tax refund season is going very well. These remittances are often the largest lump sum payments US households receive in a given year. Their size and timing can affect consumer spending throughout the first half, and we’ve seen these payments skew macro data many times over the years.
Through February 18th, 2022 (a week ago Friday, most recent data available):
- Total individual tax returns received by the IRS are up 3.5 percent versus last year to 35.9 million. That is 21 percent of all returns filed in calendar 2021.
- Total returns processed are up 12.2 percent versus the comparable period in 2021, to 33.5 million.
- Total refunds payments are up 33.1 percent, to 22.1 million.
- The total amount of those payments are up 63 percent versus during the same period last year, to $78.0 billion.
- The average refund payment is up 22.8 percent versus last year at this time, to $3,536.
Takeaway: there was some concern that the 2021 US tax refund season would be disappointing due to last year’s advanced child tax credit payments, but thus far refunds are well ahead of last year. We will keep you updated on this data as the season develops.
Topic #2: A snapshot of Fed Funds Futures probabilities for rate policy this year and how these have shifted in the last week:
March 16th meeting (leaning hard towards a 25 basis point increase):
- Futures put 76 percent odds on a 25 basis point increase and just 24 percent on a 50 bp bump.
- These probabilities are virtually unchanged from a week ago, even if they have seen remarkable volatility over the last 5 trading days.
June 15th meeting (still giving even-money odds to at least one 50 bp bump in 1H 2022):
- Highest odds go to Fed Funds being 75 – 100 basis points after this meeting, at 53 percent. This implies 3 rate hikes of 25 basis points apiece at the March, May and June FOMC meetings.
- The other 47 percent is split between rates at 100 – 125 basis points (38 percent odds) and 125 – 150 bp (9 percent odds). Both would require at least one 50 bp increase between now and June.
- As with the March meeting probabilities, there has been little change over the last week but a lot of volatility intra-week.
December 14th meeting (most likely 2022 path is 25 bp hikes at 6 or 7 meetings out of 7):
- Highest odds (33 percent) are for Fed Funds to end the year at 150 – 175 basis points.
- Almost as high (32 percent) is for the Funds rate to be at 175 – 200 basis points at year end 2022.
- The December contract odds have shifted slightly in the last week to a more hawkish perspective. A week ago, the odds of 125 – 150 basis points (5 hikes of 25 bps) were 22 percent; now they are 16 percent. The chances of Fed Funds ending the year at 175 – 200 basis points were 26 percent; now, as noted in the prior point, they are 32 percent.
Takeaway: on the plus side, Fed Funds Futures have backed away from putting high odds on 50 basis points at the March meeting. This signals that this market believes that the Russia – Ukraine conflict will push the Federal Reserve to act more slowly and deliberately. The chief point of concern remains that Futures are still putting real odds on a 50 basis point increase sometime in the first half of the year. While that is understandable given current inflation readings, a grab-bag of 25 and 50 basis point rate hikes is no one’s idea of predictable rate policy. We can only hope that the March FOMC meeting and Chair press conference will provide more guidance on how the committee is considering future rate increases.
Topic #3: Wall Street analysts have been cutting their Q1 2022 earnings estimates over the last month even though Q4 earnings season was very good. Here are the Street’s aggregate S&P 500 earnings per share estimates over the last 5 weeks:
- January 28: $51.82/share
- February 4: $52.06/share (Peak)
- February 11: $51.90/share
- February 18th: $51.86/share
- February 25th: $51.64/share
Now, you might say “that’s only a 0.8 percent cut from the peak estimate a month ago, so what’s the big deal?” Two answers:
First, the latest Q1 estimate of $51.64/share is 6.5 percent lower than Q4 2021’s actual of $55.24/share. The S&P 500 has not posted a negative sequential earnings comp since Q2 2020, when earnings bottomed at $28.25/share. That – and nothing else – is why US large caps rallied in 2020 and 2021. US large cap earnings power continued to improve in a straight line from the lows and equity prices went right along with them. Now we are at risk of breaking that chain.
Second, even though Wall Street analysts continue to raise their 2022 and 2023 estimates to more than fully offset their concerns about Q1, equity markets have their doubts about those optimistic estimates. The FactSet chart below shows the S&P 500’s forward 12-month PE ratio over the last 10 years. Three brief points on that data:
- At present, the index trades for 18.8x forward earnings, right on top of the 5-year average of 18.6x (green dotted line).
- That current forward multiple of 18.8x is still well above the 10-year average of 16.7x (blue dotted line).
- There are only 2 downtrends in this chart. The first is 2019 (visible just to the right of the midpoint), when forward PEs fell from 18x to 14x. This was due to the December meltdown of that year, when markets feared the Fed was making a policy mistake by raising rates too aggressively. The second was the Pandemic Crisis (spike lower, right side). In both cases equities were lower across these periods.
Takeaway: US large caps are getting cheaper, but for all the wrong reasons. Analysts are cutting current quarter numbers and markets are worried the rest of the year will fail to deliver better results. Stocks will stabilize when – and only when – markets start to feel more confident that 2022/2023 earnings power will continue to improve. For what it is worth, we do believe this will come to pass but respect that the tape says that sort of confidence is premature.
Fed Funds Futures (CME FedWatch): https://www.cmegroup.com/trading/interest-rates/countdown-to-fomc.html
FactSet Earnings Insight report: https://www.factset.com/hubfs/Website/Resources%20Section/Research%20Desk/Earnings%20Insight/EarningsInsight_022522.pdf