Under 5% and the S&P 500 earnings yield (EY) tells us the equity market is too stretched. The EY is not a precise timing indicator, but more of a broader relative value metric, covered last week.
The good news is that the S&P 500 rose 2.5% last week, and the Bloomberg corporate high-yield index shows that that asset class (corporate high yield or below-investment-grade credits) was up 5.31% as of Friday’s close. The last time corporate high yield showed a +5.3% YTD return was late 2021 when it finished up 7% for the calendar year.
Although markets can change quickly, it would seem recession worries are overblown, with the continued strength in high-yield credit in 2023.
Regional Banks and Commercial Real Estate
Recession prognosticators seem to be banking on commercial real estate issues, and there will likely be issues on Chicago and San Francisco and other large metropolitan areas where crime is rampant and civic enforcement is weak. The city of Chicago supposedly has a 22% vacancy rate downtown, partially due to the crime issue, but also due to “work from home” being a pseudo-permanent solution for the 9-to-5 professional office worker.
This being said, listening to a Bloomberg interview this weekend with CBRE CEO Robert Sulentic, his point was that total commercial real estate loans held by the banking system total just 1.5% of total assets and that his opinion was that the worst had passed in terms of commercial loan instability. His final comment was that he thought there was a lot of money on the sidelines waiting to get to put to work in CRE loans, but it’s just waiting as of right now.
This blog began tracking the Regional Bank ETF (KRE) after the crisis hit in early March ’23, and as of Friday, June 16th, 2023, the KRE was down 26.07% YTD. It’s worst YTD return as measured on a weekly basis was the -37.57% YTD return as of the week ended May 12th, 2023.
What gives me pause is Mr. Buffett, in the interview in early May ’23 on CNBC ( I think he was in Japan at the time) saying that he thought there would be more regional bank bankruptcies forthcoming as several others have mentioned.
It’s not a cut-and-dry argument. The inverted yield curve is impacting all financials, not just regional banks, but that’s where the worst pain is being felt since smaller banks tend to be more “spread lenders” capturing the difference between shorter funding rates and higher lending rates.
My own opinion is that as soon as the market sniffs out a return to a normally-sloped yield curve, regional banks should work again.
S&P 500 data
- The S&P 500 forward 4-quarter estimate (FFQE), fell this week to $225.06 from last week’s $225.49.
- The PE ratio on the FFQE is 19.6x versus 18.6x on 3/31/23 and 17.2x on 12/31/23.
- The S&P 500 earnings yield has fallen to 5.1% and hasn’t been this low in 15 months;
With just two weeks left in the 2nd quarter and 4 weeks until we start getting a look at the 2nd quarter 2023 S&P 500 earnings, there is little that isn’t known about Q1 ’23 earnings. This week we hear from FedEx (NYSE:FDX) on Tuesday night, June 20th, 2023.
The company’s reporting a May 31, ’23, quarter-end seems to be continuing the trend of the broader reporting from April 10th through May 10th, 2023.
Conclusion
The old saying “market correct through time and/or price” is one way of saying – if the S&P 500 remains flat through the next two weeks – it would go a long way to rectifying the overbought condition we are currently seeing.
This year – 2023 – the odds are in favor of the patient investor.
Disclaimer: Take this all with substantial skepticism. Past performance is no guarantee of future results. All S&P 500 earnings data (or the majority of it on this blog) is sourced from IBES data by Refinitiv. None of this is advice. The opinions above and the data herein may or may not be updated, and even then not updated in a timely fashion. Capital markets change quickly. Learn to gauge your own tolerance levels for market volatility.