One should always be careful not to overreact to earnings reports that are released outside the “season,” the few weeks after the end of the calendar quarter that sees the bulk of corporate earnings released. The demands of the twenty-four hour news cycle means that they tend to attract a disproportionate amount of attention and, with little else to work with, analysts often attach too much importance to what is, after all, just one data point.
Based on that, my immediate reaction to FedEx's (FDX) earnings report was that it was just a continuation of a tendency to miss expectations from the company but, based on the accompanying comments from management, this time there really does seem to be a reason to worry about the broader market.
U.S. traders and investors, it seems, are focused squarely on the silver lining at the moment and ignoring the big black cloud in front of them.
The S&P 500 has recovered almost completely from the Q4 collapse that had so many so worried for so long, but in many ways that recovery is dripping with irony. There were, as always, multiple reasons for the drop, but prominent among them were the fear of three things: a delayed trade deal with China, a miss of the deadline for Brexit, and slowing global growth as a result of one or both of those things.
The irony comes from the fact that we lost around twenty percent on fear that those things might happen, then bounced back as they actually happened.
I have lost count of the number of times the White House has told us that they were close to a “great deal” or some other such nonsense with China. It is in the nature of such deals that if the terms were really “great” for one side, the deal simply wouldn’t happen.
Of course, both sides will claim any deal to be good for them, but the reality is that we will, at best, probably end up back where we started.
And that is assuming that there is a deal at all.
The “deadline” for an agreement has come and gone, and we are still, as we were a few months ago when stocks were getting hammered, “close.”
The longer the delay, the greater the chance that any deal, good, bad or indifferent, will be too late to avert real economic damage.
The fiasco that is Brexit has followed the same pattern and runs the same risk that a deal will come too late to matter. At the end of last year, traders seemed to recognize the risk it posed. It is, like trade with China, an almost intractable problem that was brought to a head unnecessarily for political reasons.
Did anyone really think that the U.K. could vote to exit the E.U. and then do so with all the privileges of membership retained?
It is becoming increasingly clear that the leaders of the “leave” movement were really that naïve. They have voted down the only deal that Prime Minister Theresa May could make, the proposal to leave without a deal at all, and the idea of another vote. It seems they know what they don’t want but have absolutely no realistic idea of what they actually do want.
It is little surprise that with all of this going on, global growth is increasingly seen as being a worry. That was the point made by FedEx last night, who indicated that possible lasting damage has already been done, and they should know.
Nor are FedEx the only ones pointing out the Emperor’s lack of clothing. Two weeks ago, the OECD joined the World Bank and the IMF in cutting their forecast for global growth and issuing a warning.
Yet with every major economic organization in the world expressing a pessimistic outlook, U.S. traders and investors continue to whistle past the graveyard.
Their optimism comes from the fact that the Fed has signaled an end to regular rate hikes, at least for a while. In a way, the cheery mood based on that is understandable. Low rates were arguably the main driver of the recovery in stocks over the last ten years and moving away from free money was always going to be painful, so a respite is welcome.
The other side of that coin though, is that the Fed is not changing course because they believe everything in the garden is rosy. They have made it clear that they haven’t completed the “normalization” process, and the delay is in response to some weaker data and global concerns.
Could it be that if they make that clear again today, traders will finally take notice?
This isn’t the first time that the stock market has acted with “irrational exuberance,” nor will it be the last. Momentum in markets is powerful and its drivers are complex, but eventually reality has a way of making its presence felt. That can take time, though. Alan Greenspan’s famous comment was made in December of 1996 when the Nasdaq was at around 2000; it was just over three years later and just under 6000 points before the market finally came to terms with its own irrationality.
As I pointed out here though, two days before the last collapse, the longer that goes on, the bigger the reaction will be when the market does turn.
It is even possible that traders and investors will ignore the issues until they go away. That too has happened in the past. Usually, however, there is a moment when everyone realizes that things aren’t as good as assumed, and that moment could come soon if FedEx’s warning is followed by one from the Fed today.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
