Are we stagnating? Is the dreaded recession we’ve been anticipating right around the corner?

These are the questions a lot of market watchers are asking themselves after last week’s GDP report.

In case you missed it, Gross Domestic Product (GDP) fell by 1.4% for the first three months of the year. Economists were looking for a growth rate of about 1%.

_{Source: Bureau of Economic Analysis}

But wait, you say… I thought we were in recovery mode?

Well, there are plenty of directions in which to point the finger of blame for the disappointment.

For starters, there’s the Omicron wave of Covid cases that swept through the country last winter. The highly-contagious strain kept many workers and shoppers at home. Then, of course, there’s inflation. At 8.5%, we haven’t seen prices climb this quickly since 1982. To top it off, there’s the whole Russia/Ukraine conflict.

Many economists are striking an optimistic tone with the report, however, noting that the fundamentals of the economy (consumer spending and business investment) remain strong. It should be noted, though, that one more slip up like this would officially put the economy in a recession.

Anything from an overly aggressive move by the Fed to hike rates to increasing intensity in the hostilities in Ukraine could be just the thing that tips the scales. We’ll know more when the Federal Open Market Committee (FOMC) this week to make a decision on interest rates. Whether we see a quarter-point or half-point hike, the market will react accordingly, and Fed Chair Jerome Powell’s news conference (on Wednesday) will be telling for investors.

Cracks Emerging?

It’s hard not to notice what look like cracks emerging in the market during this earnings season.

For example, Amazon (Nasdaq: AMZN) reported its first quarterly loss since 2015, thanks to rising labor and energy costs (as well as slowing online commerce). Last Thursday, the e-commerce giant reported (GAAP) earnings loss of $7.56 per share for the first quarter of 2022. Analysts were looking for a profit of about $8.35. Shares immediately sank about 15% and continued trending lower.

There doesn’t seem to be an end in sight for the computer chip shortage, either. It continues to impede growth.

Case in point, Ford just reported a huge loss ($3.1 billion). Not counting special items (namely, its disastrous investment in electric truck maker Rivian), the company would have turned a $1.6 billion profit — and even then, that’s still 40% lower than a year ago. You can chalk a lot of that up to the simple fact that without computer chips, Ford just can’t do what it does best… make and sell pickup trucks.

Oh, and did I mention that Covid is making its way through China again? Much of the country is shut down threatens to upend global supply chains once more (not that they’ve even fully recovered in the first place).

Some of you may remember two years ago when I pointed readers to some resources to monitor the global shipping traffic coming into the ports of Long Beach and Los Angeles. The situation would garner national headlines a couple of months later, as the lack of port workers caused an epic bottleneck of ships waiting to unload cargo. This time around, Shanghai is the one to worry about (for now), and the good folks at Statista have produced a rendering of the current situation at the world’s largest container port.

_{Source: Statista}

Signs Of Hope

I don’t want to strike an overly dour tone today. But you should know that there are some very real threats to the market right now. And to navigate them successfully, you’ll need clear eyes and a plan to come out ahead.

Still, there remain reasons for optimism. Despite all of these macro factors, S&P 500 companies are hanging tough during this earnings season. Of the companies that have reported so far, 80% have beaten their estimates — above the five-year average of 77%.

Companies are reporting a blended (actual results + estimated results for companies yet to report) growth rate of 7.1% for Q1. This is below the five-year average of 15% and the 10-year average of 8.8%. But keep in mind that Q1 of 2021 was a banner quarter for S&P companies. As the economy rebounded from the pandemic-fueled shutdowns, companies grew earnings by more than 91% — the most since 2008. So this was always going to be a tough quarter for “comps”.

What’s more, as the chart below shows, only two sectors are proving to be a significant drag on the S&P: consumer discretionary and financials.

_{Source: FactSet}

Even still, as FactSet points out in this piece, this quarter would be even better if it weren’t for Amazon’s outsized impact. If you strip out that dismal report, then the blended earnings growth rate would be 10.1%.

Despite this, the market is off to a terrible start this year. The S&P 500 is down more than 13% — well into correction territory (defined as a drawback of 10% from highs). The tech-heavy Nasdaq is already in bear market territory (-20%), with a loss of 21% so far.

So currently we have (moderately) rising earnings combined with falling stock prices. Do you see where I’m going with this?

That’s right, stocks are getting cheaper. Right now, the S&P is trading at a forward 12-month P/E ratio of about 18. The five-year average, according to FactSet, is 18.6. That’s nothing to write home about, but it’s a far cry from where we were before this rout started.

I’m not saying that we’ve seen the end of this just yet. Corrections can last longer (and cut much deeper) than we often anticipate. But at some point, you’re going to start seeing some buyers if stocks continue trending lower. So be patient, but be ready to strike when the opportunity arises.

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