Ear to the Ground

April 29 2022

The market was caught off guard yesterday when US economic growth for Q1 came in much weaker than expected. The economy contracted by an annualised 1.4% in the quarter. This was well below the 6.9% annualised rate seen in Q4 and also the forecast growth of 1.1%.

The two key drivers behind the contraction were a large trade deficit and a decline in inventory investment. Although consumer spending improved this was offset by a decline in government spending. This weakness came before the more recent lockdowns in China so it will be interesting to see if this has a negative impact on figures for Q2. Time to worry about stagflation, or just a one quarter blip?

In Germany meanwhile the economy grew 0.2%, recovering from a fall of 0.3% in Q4 2021. The French economy posted no growth which was behind expectations of 0.3% growth and the Spanish economy grew by 0.3%, although this was behind forecast of 0.5%.

Last week it was Netflix, last night it was Amazon who became the latest of the big stocks to miss on their earnings estimates. There was a drop in online sales of 3% in the quarter. Some may say this was inevitable after the splurge seen during lockdown. The company also saw rising costs, meaning that the company posted its first quarterly loss since 2015. Other parts of the business meanwhile, including cloud computing and advertising, remained strong. The company reported a loss of $3.8bn, with a loss on the investment in electric car maker Rivian also contributing. Moving forward they warn that face supply chain issues and the impact of the war in the Ukraine is expected to be negative. The Amazon share price was down almost 9% in after hours trading.

Some of the darling stocks of the COVD lockdowns have now seen their share prices post some hefty falls in the year to date. Netflix, which we covered last week, is down nearly 67%, Meta (Facebook) down over 39% and NVIDIA down over 34%.

That is not to say that these are no longer good companies, but they are clearly seeing some pressure and ultimately everything has a true value. Non profitable technology companies in the US have also come back down to earther with a bump. With the index having raced ahead of the S&P 500 during the lockdown period, it has now reversed these relative excess gains. The index is now marginally below the main S&P 500 index, making it a painful return journey for those investors who didn’t sell out earlier.

As a consequence of the moves discussed above the price to earnings ratio on the Nasdaq Composite index has retreated back to around its pre-COVID level. I guess the key question is, therefore, what valuation do these companies truly deserve to trade at?

Next week we see the US FOMC deliberating interest rates, with their announcement due on Wednesday. The expectation is that they will raise rates by 0.5%. Will they surprise and go higher? The Bank of England interest rate decision is due Thursday, where a 0.25% hike to 1% is forecast. The market does not appear to be contemplating any more than that, but with inflation yet to peak in the UK, nothing can be ruled out.

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